Sep 21, 2026
On September 21, Rod Dubitsky, a veteran financial analyst and publisher of The People’s Economist, joined us to discuss emerging risks at the intersection of insurers, asset managers and private credit. 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 very pleased to be joined by Rod Dubitsky, a veteran Financial Analyst and Publisher of “The People’s Economist.” We’ll be discussing emerging risks at the intersection of insurers, asset managers, and private credit. Rod has decades of experience analyzing financial institutions and structured credit markets.
Today, we’ll look at private asset valuations, credit ratings, business development companies, the growing use of insurance balance sheets to fund private market investments and where risks may be building within the broader financial system. Rod, thank you so much for doing this today.
ROD DUBITSKY: Sure. Thanks for having me, Teddy. Glad to be here.
TEDDY DOWNEY: And if you have questions, we’ll get to them later in the call. You can put them in the chat or in the Q&A panel.
Rod, I would love to just get a little bit of your background, your experience with questionable ratings, shady accounting, how you’ve gotten into this world and studied these issues over the years.
ROD DUBITSKY: Okay. Yeah, I’ll give a brief background. My first day after being a freshly minted MBA was I worked at Bank of Boston in their Treasury Rotation Program. I rotated quickly out of the program into the Mortgage-Backed Securities desk, which was just starting up at Bank of Boston. This is 1987. My first day on the desk was Black Monday, where I think the stock market dropped 23 percent. So, after going through business school and thinking markets are somewhat efficient and organized, that was sort of a shot in the dark of reality of where we are.
I shortly thereafter moved to LA. And after spending days on the racetrack, betting on the horses and acting at night, as one does in LA —
TEDDY DOWNEY: Wow.
ROD DUBITSKY: Got a job with the Federal Home Loan Bank and they were dealing with they were in the middle of the savings and loan crisis. So, I went from Black Monday to a few years later having an inside view of the savings and loan crisis and how that all came about. So, again, another example of how unfettered markets can cause significant damage and markets are far from efficient when you let them run amok.
And then I went to work for the buy side for about six years, first at a savings and loan who was constantly struggling to survive because of deficient capital. Then I went to Bank America, managed their corporate bond portfolio and their mortgage-backed securities portfolio. And then took a pivot to rating agencies, moved back to New York City in the late 90s and was on the mortgage-backed securities desk for Moody’s where I handled subprime RMBS, a predecessor product to the ABS CDO. We call that re-securitizations. We rated them maybe triple B at best.
I then started seeing those bonds, those bonds that I was rating triple B in my group with mortgage experts, showing up on the ABS CDO desk, a newly formed area at Moody’s with triple A ratings. Instead of having mortgage experts, they had PhDs running quantitative models like Monte Carlo simulation, binomial expansion technique. And then all of a sudden, these junk rated securities, or low investment grade, became 70 percent AAA.
After a few years at Moody’s, I then went to Credit Suisse where I led their subprime RMBS research and built up an analytic data management platform and saw from the inside there. And after a few years dealing with standard securitization type clients and the subprime bubble started to grow, and it was clear that it was going to pop I then started my client base started branching out to equity investors, a lot of the big short investors. I had many conversations with John Paulson who, despite not being in the movie or the book, was really the big short.
And I saw how the markets were manipulated going in. I saw the ratings failing. I put out an article using our models where I said 80 percent of subprime bonds should be downgraded. And I had a bar chart and I showed the ratings agencies. So, they were at 1 percent. I was at 80 percent.
A few days later, Bloomberg picked up the story. And then about a week later, S&P did what I call the day of reckoning where they downgraded 500 subprime bonds. Moody’s followed suit. And that was probably the largest single rating action. So, they eventually caught up, but their fail ratings on the mortgages themselves, as well as on the CDOs created directly there’s a direct line between rating agencies which I think has been well covered elsewhere. So, I won’t go into that point.
And then I went to work for PIMCO in their new advisory group where we advised a lot of the post subprime crisis fallout Federal Reserve, Bank of England, and the European Central Bank were our clients. So, I ran a group there that did a lot of performed a lot of analytic work for governments and banks.
And after an interval of working ten years for a Bangladesh charity, I struck off on my own. I created the People’s Economist which is a personal finance website. But I’ve been splitting my time doing a lot of this, what I call, investigative financial journalism where I’ve covered private equity CLOs and lately more and more private credit and the insurance nexus. And anywhere I see a bubble or overvaluation or mis-ratings or inaccurate ratings, I’ll kind of bring that into my field of vision.
TEDDY DOWNEY: And let’s stick with that for now in terms of the mis-ratings. Because we spend a lot of time trying to figure out what are the rating agencies getting wrong? I would love to hear (a) where you see them getting things wrong and what they’re getting wrong. And then (b) what a better way for stakeholders in general in this space to evaluate the health of these assets and these insurers. So, like pointing out the problem. Let’s talk about the problems first and then maybe solutions second.
ROD DUBITSKY: Yeah. Well, I can start with a theme. One of the first deep dives I did into insurance and I not only called out a lot of the ratings on what they owned in particular, CLOs are a product that I completely disagree with the methodology. It’s all single B, junk rated loans, spun into AAA, 65 percent AAA assets, all based on a single input correlation assumptions which never ever gets updated. It should be a dynamic variable. It isn’t. It’s set fixed in stone, which tells you how bad it is. If that macroeconomic variable isn’t updated, you know that they don’t believe it.
And then I called out the ratings of Athene themselves, single A ratings. For example, Moody’s made the comment that, well, the financial flexibility for Athene is double B. And that’s one financial flexibility is one input into their overall rating.
Financial flexibility is double B, but we’re going to give them a single A on this because of their relationship with Apollo and Apollo as a source of strength. And I wrote, I said, that makes no sense whatsoever because Athene is the balance sheet. Apollo has a very small balance sheet. Apollo themselves says Athene is our balance sheet where equity light and asset light. Yet, Moody’s gave them a five or six notch lift on that component.
So, they not only have the underlying assets wrong, assets Athene holds, they have the rating of Athene wrong. And obviously if the rating of Athene wrong, how can the annuity holders, the customers of Athene rely on them when they can’t trust the ratings? And people might trust the ratings, but I’ve looked at it.
And another example of a very, very plain and obvious fact that the ratings are wrong. I called out Moody’s. Just in June, Fitch relaxed their ratings on CLOs. Moody’s affirmed their methodology back in April. So, you only update your ratings and I worked at Moody’s. I know, you only update your ratings once a year maybe. Moody’s confirmed it in April. When Fitch came out with their rating relaxation, published June 2nd, Moody’s then, four days later, announced that they were relaxing their ratings on CLOs.
So, to me, it was obvious that Moody’s was trying to compete for new issue business. They saw Fitch was relaxing their ratings and they came. So, even without even knowing whether the ratings are accurate, when you see that pattern of relaxation of ratings a few months after affirming the methodology, you know that they’re doing it for market share. And when your ratings are influenced by market share, the ratings are wrong. There’s no other way around it.
And I called out one of the articles I published that got picked up by the Financial Times was I called it “The Dirty Dozen.” These were single asset, single borrower, commercial mortgage backed securities. And I don’t think that they should ever be rated AAA. You should never have a single commercial mortgage that can get any kind of AAA rating, full stop. But I called out 12 deals, later up to 18. So, “Dirty Dozen” was 12, where the underlying loan was actually in default and the rating was still near AAA.
So, the rating was at or above the U.S. government’s rating backed by a single mortgage that was already in default. And it’s just an obvious and ridiculous miscarriage of whatever a rating should be. And they eventually caught up and I kept publishing it and pounding on it. And then again, when the FT calls them out I have a small voice, but if the FT picks it up and TREP also picked up they also covered my article in a podcast and TREP is an expert on commercial mortgage backed. So, they eventually caught up, but it took them a while. And you’d see big gaps down in ratings, double A to double B.
And so, those are just a few examples. I have many more that I can talk about, but I’ll leave it there.
TEDDY DOWNEY: And if you’re a stakeholder, you’re an investor, you’re a regulator in these markets, rather than relying on the ratings which you’re saying you can’t because they’re competing for market share, they’re inaccurate, they’re doing stuff that is divorced from reality what is a better way to look at the health of an insurer and just to do your own homework, to assess the quality of the assets and do the work that you’re doing? I mean, what are some of the red flags that you’re seeing that an investor or stakeholder, a regulator. should be focused on, hey, this tells you there’s a problem here? And these are the types of things that get ignored by the rating agency.
ROD DUBITSKY: Yeah, it’s impossible to come up with a precise risk assessment because the degree of transparency in these complex structured instruments is very difficult. But I’d point to categories that are reported on insurance companies’ balance sheets.
So, the NAIC permits a private letter rating. And that’s not a formal rating. It’s a relatively informal rating. It could be one rating agency or two. And that’s a specific category within — so, you could start off with that as, you can’t assess the risk. You can’t come up with a replacement rating based on what’s disclosed. But you can say, okay, that’s a red flag for me.
That private letter rating led me to MassMutual, which had been widely reported as having among or maybe the highest exposure to private letter ratings. So, I thought, well, I’m not going to cover MassMutual because they’re AA+. They’re a mutual, old line insurance company.
But I kept seeing them show up. I said, let me look at their balance sheet. And I did, and I categorized what I call $110 billion assets of concern. Far beyond the private letter rating amount, I characterized $110 billion of assets of concern. I then compared it to their capital surplus of $30 billion. And I said, these are very risky, opaque assets that are far riskier than the rating. Some of them aren’t rated. Some of them are equity interests. But it’s $110 billion of varying degree of risk compared to $30 billion of capital.
I look at CLOs as another category. I look at the ratings distribution because you can get a sense of risk, even though I don’t believe the ratings. But at least if it’s triple A. It’s at the top of the waterfall. Even though the rating is wrong, it still has a higher seniority, which mathematically is better. So, when I compare Athene and MassMutual, they both have a high exposure to CLOs, but Athene’s exposure is mostly below AAA. Whereas, MassMutual CLO exposure is mostly triple A.
So, you can get a sense of the risk there. But if you don’t believe these CLO ratings, what do you do? I put my money where my mouth is. I reverse engineered Moody’s CLO model. I put it on my website, www.tpehub.com. You can go to the website and pull up a simplified version of Moody’s CLO model. You can input the correlation assumptions. You can change some of the other assumptions. And you can see how quickly the AAA CLO rating collapses to BBB and lower.
So, if you reverse engineer the rating agency’s model and you play around with the parameters, you’ll see how highly sensitive those models are to these inputs. But who’s going to do that in reality? I’m probably one of the few journalists who’s done it. I don’t think too many investors care about the correlation assumptions. They just like the spread and they run flat default assumptions. They like the AAA rating because they get to report it in a low risk plus bucket.
TEDDY DOWNEY: You mentioned a couple of things here as well that are kind of general red flags. Like, do you have a lot of private letter ratings for your assets? Is there anything about just the incentives of the private equityowned insurance ecosystem that itself is a red flag?
Because that’s how I’ve started to think about this, that your assumption that the insurer is sort of doing the right thing in terms of taking on the appropriate amount of risk, their incentives are really not aligned with what you typically think for an insurer when the parent company is private equity-owned and they’re pushing all of their portfolio loans to their portfolio companies into their own balance sheet.
They have an incentive to take the worst stuff and stick it to the insurer and leave the insurer sort of loot the insurer, take all the fees out, load it up with bad assets. And then if it goes belly up, they’re not on the hook. The taxpayer and the policyholder is on the hook. Is the structure itself a red flag in addition to all this granular work that you’re doing? Because I don’t see any conversation of that by the rating agencies either in terms of the health of the insurer. And you would think looking at the incentives would be an obvious place to start.
ROD DUBITSKY: Yeah, I think, well, I mean, if you go through Athene’s — one of the surprising things I found in Athene’s statutory filings and you may have heard, or the audience may have heard that insurance companies, in their filings, have to report whether they spend more than 25 percent of their expenses on one particular service provider, either an auditor or a rating agency. And I found Moody’s I don’t remember the exact number, but Athene reported a $5 million payment to Moody’s. I expected to see KBRA, who I heard they have a good relationship with. But when they pay $5 million to Moody’s, is Moody’s going to call out the relationship?
I’ll give you an example of one of the most brazen examples of conflicts of interest. Apollo had a REIT, ARI, Apollo Commercial Real Estate Finance (ARI) , I think. ARI is the ticker. And they announced that Athene was going to buy $9 billion of the loans at a price of 99.7, just slightly below par. And I speculated with some evidence from S&P that REIT was in trouble. Because S&P mentioned risk of increasing defaults, increasing margin calls. because it was a levered fund.
So, I said, is this something an independent, arm’s length buyer would do? Buy $9 billion in possibly troubled commercial mortgages at precisely 99.7. And then Blue Owl followed up with a loan of their own, exactly also at 99.7 of BDC loans, Business Development Company, junk rated loans. They sold to Kuvare, their captive insurance company. Somehow they landed on the same price. I don’t know what’s the magic of 99.7. Maybe because it’s not par. It appears to be a plausible precise price. But it’s close enough to par where they’re not going to take a loss.
But those are just two examples. And you look at some of the large, chunky Apollo-related investments that land on Athene’s balance sheet. I just don’t see that as being somebody who has an independent risk assessment. And I pointed out I published it. So, I can say it here. At the time I think it’s still the case the Chief Risk Officer of Athene is also a partner at Apollo.
Well, if you’ve got your Athene income and you’ve got your Apollo income and you’re wearing two hats, where are you going to get paid more? Your partner income at Apollo or your chief risk officer role at Athene? Just the conflicts of interest alone should be called out by rating agencies. It should be called out by the regulators, but it’s not.
And just the other day, I published an article on SoftBank. And I came upon SoftBank because I saw Athene had a $2 billion investment, which is 50 percent of their surplus, in a vehicle called SVF. It turns out that’s a SoftBank vision fund too, the second fund. And when I started looking into the details, it’s a big bet on OpenAI. It’s a single, 50 percent of their surplus bet on OpenAI. Because that SVF2 fund, 90 percent of the value of that fund which is the value backing that NAV loan, net asset value loan 90 percent of the value of SoftBank vision fund 2 is OpenAI. Nobody would know from looking at that line item that Athene has bet 50 percent.
Well, that’s not Athene just going in the secondary market and finding it. Apollo announced $5 billion loan, NAV loan, to SoftBank. And now actually just this week, it’s been upsized to $6 billion, actually maybe $9 billion. Who’s going to own that, right? Who’s going to buy that extra? Does Apollo have the distribution network of a Goldman Sachs or a JP Morgan or a Bank America? Or are they going to rely on Athene to honor the promise that Apollo made to SoftBank?
And you can take the numbers larger. There’s a $5 billion data center loan to SpaceX. I found $3 billion of that sitting on Athene’s balance sheet. I wrote about that. That’s a $3 billion loan to a SpaceX data center securitization through an SPV. Investors are not going to be able to look through that. I look through big line items and I trace that back. So, yeah, this is a SpaceX loan.
So, that’s $5 billion of loan to investments to very, very leveraged AI that’s sitting on Athene’s balance sheet. How many fees does Apollo collect on those independent of the risk that Athene is taking, right? Apollo might say, well, we’re aligned with Athene and we earn a lot of money from that. But if they’re earning a lot more fees originating the loans and the asset than they are on the spread between the assets yield and the annuities, are they really aligned with Athene?
So, I keep mentioning Apollo because I’ve done the most work. But they made the fair point. They say every insurance company has an asset manager. Every insurance company is structural. Whether it’s Berkshire Hathaway, whether it’s MassMutual, whether it’s Prudential, they all have an asset manager and it’s often their captive asset managers.
So, they’re right in that respect. And what I gave them credit for, I said, well, MassMutual has the same risk, right? They have their Barings affiliate. They own Barings. It’s the other way around. But a lot of the risks that they were taking were from Barings originated assets.
So, maybe Apollo’s point is correct that all insurance companies should be questioned about their investment affiliate. And the private equity could be the most egregious, right? I called out other insurance companies as well, not just Athene. So, I’ll leave it there.
TEDDY DOWNEY: Yeah, I mean, this is all super interesting. I think this transitions to another question I have here about you mentioned affiliates. Obviously, there’s been a tremendous amount of scrutiny into Walter insurance practices. How do you see that? I mean, you’ve already mentioned that it’s going on across the industry. But affiliates isn’t just limited to Walter. It’s an industry standard practice.
The way I try to think about it is Walter got caught because they were lying about their affiliate. And the other insurers just get their regulator to approve their affiliate relationships, exempt them from the rules. Walter had the audacity to think that they were violating the rules and had to lie about it. Whereas, everyone else just gets their regulator to be in on the joke. Is that the right way to think about it? Or how do you see it?
ROD DUBITSKY: Yeah, I mean, I think I joked about that. The difference between Apollo and the Walter entities, Apollo has better lawyers. And what I still don’t know is because to be fair to the Walter entities and all, there is a fair amount of judgment call in what is an affiliate. And I’ve got an article I’m going to put out on you may have just seen that South Carolina put two ACAP entities into or petitioned them to be in rehabilitation. And if you read the rehabilitation order, this is just a road to liquidation. They also had disputed affiliate determination.
And with Apollo, when I first published my report, I said Apollo showing 15 percent affiliated. My calculation shows it’s over 50 percent Apollo. And Apollo later came out with their own analysis and they called it Apollo originated assets was over 60 percent, even more than I estimated. And so, Apollo originated doesn’t mean affiliated from a statutory or accounting definition.
So, there’s a little bit of wiggle room in terms of the definition. And I think the Walter entity admitted it. And they also had a whistleblower. Without the whistleblower, I’m not sure if Walter would have been viewed any differently. But I think it was the whistleblower and the fact that now they’ve admitted that they made a mistake. They didn’t fight it. Either it was clear that they were and what I don’t know is, was it intentional or was it just a misunderstanding of the gray area between the lowercase definition of affiliate and the official statutory definition of affiliate? And you have related party and you have accounting definition. So, it’s a lot more complex than some of the headlines.
So, initially I didn’t cover the story. I’m like, well, okay, what are they doing different than what every other PE owned? Brookfield, I published a table from there, well, from our front end. I said, look at all these Brookfield investments that their subsidiary had. They’re all called Brookfield. They’re all called unaffiliated. Well, if Brookfield is in the name and it’s not affiliated, how is that possible?
And to your point earlier, they get special exceptions from the regulators, right? Permitted practices, I believe is the term. And permitted practices allows individual insurance companies to deviate from the NAIC standards. And I believe Brookfield has gotten that in Texas and maybe the other state, Iowa. There are two subsidiaries. You’ve got multiple subsidiaries for each insurance company. So, if you want to look at Brookfield, you’ve got to look at their multiple entities. Same thing with KKR’s Global Atlantic. Same thing with the Walter entities, right? There’s multiple insurance companies. Sometimes they’re reinsurers of the larger insurance company. So, it’s pretty and I could see how regulators are just overwhelmed by the complexity of it all. And we didn’t even touch reinsurance yet. So, that multiplies the complexity of evaluating the risk manifold.
TEDDY DOWNEY: Yeah, I mean, I could spend all day talking about this. We could go down so many different rabbit holes. This affiliates stuff, let’s stay on this really quickly because I want to get this in people’s heads. The thing that trips up Walter in the affiliate is that then becomes a riskier asset, right? If it’s affiliated, there is an understanding that, well, then you do have bad incentives and that this should be viewed as a riskier asset. And so, if you have that as industry standard and all these regulatory exemptions, don’t you by nature just have a lot more risky assets on your balance sheet than people realize? Because regardless of how you define it as affiliated, it’s still risk. It’s still riskier. It should still be viewed as riskier.
ROD DUBITSKY: There’s a few aspects of the affiliate that create risk. And so, in this ACAP entity, the statutory, the regulated filings talk about excess concentration. So, if it’s all affiliated, you have number one, the concentration risk, which you can have to any entity, but you’re more likely to have an affiliate. And there could be a presumption that those are riskier assets. Like Athene owns around $30 billion CLOs. Disproportionately, they’re Apollo originated CLOs, Apollo managed. Are Apollo CLOs any riskier than KKR CLOs? Maybe not. So, it’s not a straight line to affiliate is riskier asset. But when I see $9 billion of commercial mortgages going from a REIT that maybe was having trouble to Athene’s balance sheet, I think the presumption should be that they’re riskier unless Apollo can prove otherwise. That transaction should go through regulatory approval with an expert, commercial real estate expert, looking through those loans, going through the current status. It should not be for Apollo to take $9 billion of commercial mortgages two times their surplus and put them on Athene’s balance sheet. That should get and maybe it does and I’m not aware of it. But there’s definitely a potential riskier asset and there’s potential concentration and there’s the conflicts of interest. So, all of those conflicts of interest, presumption of riskier asset and the concentration to a single counterparty, all collectively add to the greater risk.
So, the Walter entity say we’re going to substitute, I think it’s $6 billion of assets and they’re going to restructure the rest. So, I don’t know where they’re going to place $6 billion of affiliate assets. Because maybe those assets were on the insurance company’s balance sheet because they weren’t so attractive to independent third parties, maybe. But yeah, there’s a host of risks associated with affiliate. But affiliate doesn’t always equal risk. So, it’s not as clear cut as affiliate is riskier.
TEDDY DOWNEY: I think you laid out some great criteria to assess where the risk is in those affiliate transactions. Now, there’s a lot of focus on risks in this PEO and insurance space. Where do you think the most underappreciated risks are that need more attention from regulators and stakeholders?
ROD DUBITSKY: Well, I pointed out a category that has already been on the NAIC’s radar but I don’t think it’s been anywhere near covered enough in the media or the analyst community and that’s equity ABS. And that’s an asset category that the NAIC themselves created in 2025 because they saw an increasing number of assets that, to them look like equity, but through the magic of financial alchemy and through very generous ratings, sit at investment grade on insurance balance sheet, which means 1 percent or 2 percent capital charges.
And some of the assets I’ve looked at, and I looked at this specifically with Athene and MassMutual. And I said, there’s no way that this is an investment grade asset. Collateralized fund obligations is a growing asset class where they will securitize the limited partner interest of private equity funds. And it could be secondaries, could be private credit, there’s a whole range of it. And that’s one of the asset categories that sits under equity ABS.
Apollo has come out with a new product called AMAPS. And that product they are viewing as a better CLO, a better version of a CLO. They’re like, oh, all the underlying assets are investment grade. But half of the assets are actually other Apollo funds. Half of the assets are investment grade, but probably dubious investment grade.
So, that sits in equity ABS. And that AMAPS, which they keep issuing more and more of, and more and more of it I’ve documented it sitting on Athene’s balance sheet that should be detailed and dissected by their Iowa regulators. And the NAIC should be looking at that.
One example of what you do to replace ratings, I actually did. I was at PIMCO. One of the projects I did, postfinancial crisis, was NAIC was looking to replace RMBS ratings, Residential Mortgage Backed Securities ratings, because they had all been in BB. All the insurance companies that owned these BB RMBS were now going to have a massive increase in capital. Well, the reality is that the risk was a lot more varied than the BB rating would imply. So, the NAIC wanted to replace those BB ratings with a quantitative approach.
So, they hired we got selected to run the RMBS. BlackRock did similar for CMBS. And we ran 20,000 line items through our modeling and analysis. And it was validated by our trading desk. So, it had a market truth component based on our portfolio managers who at PIMCO were among the best in the business. Validated the output and those ratings were replaced by our quantitative assessment. So, and they’ve done similar they’re doing something similar with CLOs now. So, they can go in and replace the ratings with an internal approach. But it’s usually too tepid and sort of after the horses left the barn.
But this Equity ABS to your point is one of those categories the NAIC is looking at. And reinsurance gets a lot of headlines, but not nearly enough,
TEDDY DOWNEY: Yeah, do you want to talk about reinsurance really quickly? I mean, we spend a lot of our time on reinsurance, just making this whole process even more opaque. It’s already complicated enough. They already look kind of insolvent. And then you shift all that accounting into an even more opaque environment. How do you think about the problems with reinsurance?
ROD DUBITSKY: Reinsurance has been a core part of the insurance industry for forever. So, it’s how it’s being used now and the degree of offshore-ness, opacity.
I’ll give you the most recent example. I published an article on Security Benefit Life, which I called part of the Guggenheim affiliated entities. Security Benefit Life is owned by Eldridge. Eldridge was a company started by Todd Boehly who came out of the Guggenheim network. Security Benefit was owned by Guggenheim and later spun out and is now owned by Eldridge, run by Todd Boehley.
So, I did a deep dive into Security Benefit. I said, well, everyone’s covering Delaware Life and the direct Guggenheim entities. Let me cover Security Benefit given their size. And what I found in their reinsurance is their largest reinsurer is a company called Sky Ridge. And I think $12 billion is reinsured with them. It’s considered unaffiliated. You read media about them. Fitch says they’re “sponsored” by Security Benefit. I looked at Sky Ridge’s financials.
First of all, it’s a Bermuda reinsurer owned by a Cayman entity, right? You can’t get it — like it’s Cayman entity owns it. It’s Bermuda subsidiary of a Cayman entity. And what’s more is they talk about they don’t mention Security Benefit. They say our main client has $10 billion of our business or $12 billion.
So, I’m like, okay, 100 percent of their business is Security Benefit Life. Other people say it’s a sponsor of it. How is that not an affiliate reinsurer? Again, another example of affiliate abuse.
And I published an article called “Weapons of Mass Deception” covering exactly the topic of reinsurance.
Vermont is the largest onshore, offshore reinsurance haven. And they’ve allowed a permitted practice of an asset called XOL, excess of loss, which is basically a phantom asset. They allow that to count as equity to the insurer’s balance sheet. And a lot of people view that asset as worthless or a mirage or a phantom asset, however you want to call it.
Tom Gober, who you guys know well, knows far more than me on this topic. But he educated me about the risks of XOL insurance. And I looked at the balance sheet of their Vermont entities. And you look at who they’re reinsured with, and the reinsurer of that asset books no liability.
So, they (the reinsurer) say, we’re not taking any risk, yet somehow it shows up as an asset on that ceding insurer’s (Brookfield in this case) balance sheet.
And KKR’s Global Atlantic insurers are providing reinsurance of $100 billion to other insurers. In fact, for MetLife, one of their largest counterparties for reinsurance, are the Global Atlantic entities, Commonwealth being one of them.
And that is a concentration of risk in a risky entity. And then those entities in turn reinsure offshore. So, if those entities are reinsuring offshore Bermuda. So, what happens is MetLife gets to say, it’s a domestic unaffiliated reinsurer, but it’s a KKR entity. So, red alerts should go off. And then Global Atlantic is in turn reinsuring offshore. So, are they really onshore reinsuring if most of the risk is in turn passed offshore to KKR’s own Bermuda reinsurer?
So, it’s not necessarily the fact that reinsuring in Bermuda is bad or much riskier, but there’s an opacity in their reporting and a difference in the risk-based capital calculations that makes you wonder about that. But is Bermuda any worse than Vermont in terms of their relative relaxation of standards? I can’t say. Bermuda pulled the license I talked about ACAP. Bermuda pulled the reinsurance license of 777 RE. 777, who just filed bankruptcy and they’re affiliated with the South Carolina entities I mentioned earlier they had a reinsurer and their Utah insurers were reinsured. But Bermuda came in, and pulled the license for 777 RE. So, all that reinsurance had to go back on the books of.
So, that can happen. So, Bermuda took action. Bermuda also disallowed Egan Jones as a rating agency. But Egan Jones is one of those rating agencies that’s been in the headlines for being too liberal with their ratings. And Bermuda was the first to pull them as an eligible rating agency.
So, I’m not going to slam Bermuda simply because of the fact that it’s offshore. But they don’t publish as detailed statutory filings. Like Athene, for example, Iowa domiciled insurers publishes detailed statutory filings. Athene’s Bermuda entity does not. So, we don’t know exactly what the Bermuda entity owns because they don’t publish the detailed holdings.
TEDDY DOWNEY: Yeah, you mentioned this race to the bottom between Vermont, Bermuda, Iowa, maybe Delaware. I mean, I’m certainly interested. We got that letter from Senator Warren asking about NAIC regulations. I would imagine if the Democrats win the Senate, she would be bringing all of these state regulators at least sending some subpoenas, trying to figure out, get to the bottom of this race to the bottom here when it comes to state insurance and opaque accounting and things like that, exacerbating these risks.
I want to ask one last question. Then we’ll turn it over to listener questions. Do you have any thoughts on the mergers that are going on right now that are sort of attracting more attention to these sort of accounting issues, the Aquarian, Bright House and Equitable, Corbridge transactions?
ROD DUBITSKY: Yeah, it’s a good question. I’ve started to look into Corebridge and Equitable because of the combined size.
One red flag I had on them, and I haven’t published it yet is that both reinsurance a large amount of variable annuity risk with a reinsurer called Venerable.
TEDDY DOWNEY: That name rings a bell, but go ahead, yeah.
ROD DUBITSKY: I came across them when I heard somebody mention them as being a reinsurer for variable annuities, and that somehow Venerable has a better way of hedging the market risk. And I thought, well, that’s interesting. Are they better at it? Or are they just not properly recognizing the risk in their statutory accounting?
And I started looking at Venerable more and more. And two of the largest customers of Venerable are Corebridge and Equitable, right? They’re the two largest user of them. Equitable also has an Arizona entity, and I think Arizona’s a little bit more relaxed than maybe, I think they’re New York.
So, looking at that reinsurance component of the variable annuity risk is one of the things I’m looking on. And by the way, that reinsurer, Venerable, is affiliated or owned by Apollo/Athene. So, it’s another Apollo entity separate from Athene. Although, Athene’s got a relationship, a reinsurance relationship, with Venerable.
So, I’m looking at the asset side of Corbridge and Equitable, I believe the merged assets will be about a trillion dollars? And I think it’s been approved, but not finalized. I think it’s due to be finalized at year end. So, I’m trying to put something out leading up into that merger. I’ll have more to report on that in hopefully the coming days or weeks.
TEDDY DOWNEY: Okay, great. Yeah, I look forward to reading that. We’ve got a lot of questions out here.
Did Athene put out this presentation because any of your recent inquiries and it links to ir.athene.com, presentations. I don’t know if you’re familiar with that. But are they responding to you?
ROD DUBITSKY: Athene does a great job of putting out these very detailed presentations, disclosing a lot of hot topics. Whether they followed my lead, I don’t know. But I can say a lot of what I call them out on, they put topics out on.
So, I think I was the first to call out Athene’s $9 billion BDC investment. We didn’t talk about these yet. Athene owns $9 billion of unsecured BDC debt. Their largest one is a Blackstone debt, which is like, I think, $2 billion. So, I published an article on that. In that same article, I called out Athene’s exposure to CLOs. Sometime thereafter, Athene put out a presentation on their exposure to CLOs and BDC debt. Was it because of my article?
So, I think they have to respond to it. They haven’t responded to me directly. And this issue of affiliate definition, where I said several times said Athene’s affiliations are over 50 percent, nowhere close to what they’re reporting. And then Apollo came out with their presentation on Apollo-originated assets which was over 60% – even more than my estimate.
So, they put out some really good they put out a lot of detail on their reinsurance relationship with Bermuda. It kind of always, in my mind, stops at the water edge of being revealing of what we need. But you can’t fault Athene for lack of transparency in terms of trying to get ahead of a lot of these issues. So, I hope they responded to my I hope I had that influence where they put out presentations, but I really don’t know.
TEDDY DOWNEY: Yeah, I mean, it is, I guess, honorable to say that you have 60 percent of your assets that are effectively affiliated. It doesn’t really resolve any of the underlying concerns about that, unfortunately.
We’ve got another question here. These questions are around private equity and their insurance entities haven’t been around for some time. Is there a reason that there seems to be a large push in multiple media locations to focus on this issue now?
Yeah, I would love to get your thoughts on that. And I can certainly weigh in on why we’ve been spending more time on it as well.
ROD DUBITSKY: Yeah. So, I published an article in 2020 where I highlighted risk of three parts of this ecosystem. I covered pension funds, CLOs, and private equity. Didn’t mention private credit. I don’t think I mentioned insurance companies at that time. So, that was 2020.
So, I followed the growth of the industry and started covering it. And I covered Athene first, just because I think Apollo was, in terms of size and scale, and because of their history with Executive Life Insurance who failed. You know, Apollo’s relationship with the insurance industry goes back to the post-Drexel junk bond era where Executive Life was a large investor in Drexel junk bonds, and that took them down. And then Apollo’s first big trade was buying at a deep discount the Executive Life assets, if memory serves. And then I think Apollo got the idea of doing that, controlling an insurance company. Hey, look, Executive Life bought a lot of Drexel’s paper, but Drexel didn’t own Executive Life. What if we own the insurance company and we controlled it?
So, my coverage of this has followed basically the size and risk of the industry. I think I was one of the first to put out a detailed report on the industry, specifically focusing on Athene and Apollo. So, it’s the size and scope and what I see when I find. If I didn’t find anything, like if I looked at MassMutual’s balance sheet and I couldn’t find any risk to it and it looked normal, I probably wouldn’t have published anything on it. And it was because they were in the headlines and the data shows that they own a large percentage of private letter ratings that caused me to look at them.
So, it’s in the data and the risk. I don’t chase the headlines. In fact, I covered Security Benefit because they were less covered than Delaware Life and the direct other Guggenheim entity. So, I try to cover things that I think are important, but not saturated yet in the mainstream media.
TEDDY DOWNEY: Yeah, I would say a few things. One is, yes, this has been going on for a long time, but if you look at the incentives, when the incentive is to loot the insurer and basically push all of this insolvency risk onto the taxpayer, then you start to see a lot of the parallels between now and 2008, right? And as you start thinking of this, not just as a risk to individual companies, but the systemic risk of the entire ecosystem, you have much bigger societal implications, much bigger.
And our audience is the policymakers, the law enforcers, and all the other stakeholders in this ecosystem. And so, for us, it becomes a much more interesting thing when you start looking, peeking under a hood, and there’s a lot of seemingly insolvent big insurance companies and no way to resolve really the failure of one large insurance company probably wouldn’t be manageable for the current state level regulatory structure.
Also, you’ve got examples of regulatory capture. You’ve got big the market size is really large, and it’s been going on for a long time. And so, all of that looting of the insurer, all of those, the extraction of that rent into the parent company has left it, leaves the ecosystem more and more fragile over time. And so, we’ve just gotten to the point where it feels really fragile, really problematic.
And then you have the Walter situation. Then you start to see, oh, how one law enforcer poking under the hood a little bit can just unravel a huge amount of that shell game that was going on. And then that’s a story, right? And then you have mergers. And are they going to get approved because they have relationships with Guggenheim?
So, you can see how there’s more scrutiny here. There’s more public interest. Certainly, for our audience, I think we’ve seen a big uptick in interest recently. And so, to me, that all fits together as in terms of answering the why now question. I’m curious if any of that resonates with you, Rod.
ROD DUBITSKY: Yeah, I mean, I think the systemic risk aspect of it and you mentioned taxpayer bailout there’s, I think, a far greater and near term risk of destruction of wealth. Like somebody reached out to me a few people have reached out to me, individuals with exposure. Somebody reached out to me and said, oh, I had an Athene annuity, but I and this is no impact for me. He said, I cashed it out. I sort of paid the surrender charge because I saw they were owned by an offshore entity. Because if you look at their org structure, there’s a Bermuda holding company entity. And that’s not necessarily a reason to surrender.
I think all the things I point out too. And somebody else said, I’ve got $2 million of value in mass mutual funds, and I’m concerned about them. And this is after my Mass Mutual report. So, that’s $2 million. There’s no bailout that’s going to cover that, right? They may cover they may bail out the state insurance guarantee system. Or the states may bail it out through taxation. Some states have a way to tap through the tax system, to reimburse the insurer who’s paid for a bailout for losses. But all of the amount of coverage you get is not nearly enough to cover the net worth of what you’re expecting, especially if you’ve got a long-term life insurance contract.
I had a life insurance I’ll say the name with prudential, and I’d been paying it ten years. And I surrendered partially because I don’t not that I have specific concern about Prue, but I’m like, I don’t know if they’re going to be around to pay it. And I don’t want to keep paying the premiums. I didn’t need it.
It was a whole host of reasons. But I got 10 percent back from my policy. Well, if Prue fails I don’t expect them to but if the insurance company fails, your life policy, which you are planning for your next for your kids is far higher than the present value that you’ll get paid out if the insurance company fails.
If you look at life insurance in force maybe the numbers better, but let’s say it’s $60 trillion, right? And that’s the notional value of the contract, right? Reality is let’s say $10 trillion of insurance assets. But people who are planning 20, 30 years out their lives are looking at much bigger numbers than they’ll get paid out if an insurance company fails, even if they’re bailed out. And that’s, to your point earlier, it’s the individuals who are going to suffer the most.
And then the states, you look at how slowly the states have been resolving these companies. There are people who accuse Connecticut with PHL. Did we talk about PHL?
TEDDY DOWNEY: Not yet.
ROD DUBITSKY: So, PHL was first put into rehabilitation and there are people who accuse them of not liquidating because only when you liquidate does the state guarantee funds kick in. So, there’s an incentive for the state guarantee funds to say, don’t liquidate, rehabilitate.
And if you read the order for the ACAP’s South Carolina entity, you’re like, how is this not going to a liquidation? You read what they wrote and you tell me if there’s any chance that they can rehabilitate. Maybe they’ll find somebody to take over the policies and fill in the gap somehow.
But this has been brewing for since 2024, right? These issues, the fraud issue at the affiliate for ACAP has been going on since 2024. And the regulators know it. So, they’re just slow rolling these resolutions in a way that people are paying the premiums, right? People were complaining on Reddit. And I call it a Reddit run because people might go to Reddit as these failures start happening more and more. They say, the regulators telling me to keep paying the premiums. I’ve got $2 million of policy and I’ve got to pay these steep premiums. I know I’m not going to get that money back, but they tell me if I don’t pay, my policy is going to lapse.
Now, is that a one-off? I don’t know. But imagine you’re seeing your company in the headlines and you have to decide, do I surrender? Do I let it lapse? Or do I keep paying my premiums not knowing whether that company is going to be around? Or whether I’m going to get one 10th because of the maximum guarantee, whether I’m going to get maximum, a small fraction, of what I’m expecting to in my estate planning.
TEDDY DOWNEY: That is a great point. You bring up surrenders. You bring up confidence in the system. A lot of people say, well, this is such a great business model, permanent capital. It’s not like banking. They can’t have a run on the bank.
But you mentioned really what this is mostly it’s not people think of life insurance. It’s really retirement, right? It’s really people’s retirement money, I think, more accurately. What do you see as the risk of this unraveling? Or what do you see as like the first shoe to drop or the next shoe to drop in terms of the shell game unraveling? I’m mixing my metaphors.
But you mentioned surrenders. I definitely think there’s a little bit of a run on the bank possibility here in multiple respects. You could have the customers figure out, wow. This is a lot riskier than I thought it was. Maybe I should pull out my money. Maybe I should surrender, take whatever fees or whatever there are there.
Or alternatively, you’d have investors wake up to the risk and have the bonds sell off. Or you could have investors in these FABNs wake up to the risk and not want to enter into those agreements anymore at the current prices. There are just so many ways that this feels fragile from a transparency standpoint, a sort of like wake up and all of a sudden, your whole ecosystem gets it doesn’t make sense. The fragility, it breaks, right? Because you just need a little bit of an informed stakeholder on one of these sides to create a bit of a run on the bank situation. Is that how you think about it? And that’s how I’ve recently thought about it.
ROD DUBITSKY: Yeah. I mean, the FABNs and this is one I’ve called out Apollo on Funding Agreements have become one of the largest sources of funding for Apollo, This includes their Federal Home Loan Bank Advancesas well as repo funding agreements. And the reporting is not like bank reporting. I can go into a bank regulatory filing and see the exact asset liability distribution. But they don’t publish the maturity distribution of their FABNs. I suspect it’s a lot shorter and therefore subject to rollover risk.
And the assets are a lot longer, especially all the private credit, all the CLOs. Especially if you need all the mortgages if you need to extend maturities, all of a sudden, your duration on your assets lengthen out exactly at the time as all these funding agreements.
And these are professional mostly professional investors, I think, in the funding agreements. So, they’re going to be gone. They’re not going to roll over that risk. And how do you replace that risk, right? You can do retail. You can go to do baby bonds, which I think some of these insurers are doing baby bonds. The BDCs are doing baby bonds. To go after retail investors, we probably are more likely to reach for the yield.
TEDDY DOWNEY: So, you think that professional investors aren’t going to roll over the FABNs already?
ROD DUBITSKY: That is probably among the top. I mean, you said it. It’s among the top concerns I have in terms of a run on the bank. I think that’s more likely than funding agreement surrenders.
TEDDY DOWNEY: Because that’s a sophisticated investor as opposed to a lay person, basically, with the policy.
ROD DUBITSKY: Well, the good thing with funding agreements, you can’t cash out early. You can’t surrender a funding agreement. If you have a three-year funding agreement, you can sell it, I guess, in market value and take loss, but you can’t force Athene to repay you.
Whereas an annuity, and most of these different companies have different asset types, right? I think Athene is mostly annuities in terms of their insurance product, which is really like an investment product. It’s like a medium term note, but it’s tax deferred. So, it’s legally classified as an insurance product. Just like the gentleman who told me he surrendered his Athene annuity, the annuity premiums are the surrender charges are nowhere near high enough to justify if you think the credit risk is too high. If you’re concerned about whether it’s any of these companies, not just Athene, if you’re concerned about credit risk, you pay an eight-point surrender fee versus risk of losing X dollars.
I mean, if you’re within the state insurance guarantee, you’re probably okay. And we can get into the whole state guarantee system, which works completely differently than FDIC insurance. Policyholders should have much less confidence in the state-based guarantee system than I would in the FDIC, who we saw can step up at the federal level and guarantee. Look, the FDIC stopped a run on the banks after Silicon Valley Bank. Because they said, we’re going to guarantee any insurance. They didn’t say any bank, but people, I think, had confidence that if a bank fails, they’re going to step up and guarantee all deposits.
You don’t have anything like that at the state level. The federal government will have to intervene. And by the time they can intervene legally, it’s going to get far worse. That’s why I’m somebody who agrees with the idea that there needs to be more of a federalized regulatory system, maybe not replace the state system. But the NAIC needs to have more teeth or a different organization. Or the states can’t so easily do a permitted practice or prescribed practice which basically weakens the standards relative to what the NAIC puts out.
I’m on a panel also in November on the 50 state regulatory legislators. Because I spoke to the Indiana Senate Finance and Insurance Committee about insurance PE risk. They were already looking into it in-depth. And I guess they came across me with another podcaster, Nick Nemeth, who you guys, I know, have at your conference.
So, they want me to speak. They saw my Indiana presentation. They want me to speak in November. And I’ve got to be careful, because they’re the state regulators, right? And to some extent, the state regulation system, they believe in it, right? They believe it can work, right?
And so, if it’s going to work, there has to be, I think, some degree of controlling the ability to forum shop, state forum shop. And if some states are too conservative, then the NAIC can say, well, maybe our standards are too conservative in this respect.
Let’s look at it at the federal level, and let’s not have everybody saying, well, I trust this insurance company, but they’re in Texas. Does Texas have permitted practices for Brookfield? Do they have preemptive practices for XOL assets, like in Vermont?
I mean, there’s a difference between preemptive practices and permitted practices. I think one is institution level. One is state for anyone in the state. Maybe you know about that. But I think having state-based permitted practices weakens the ability, and it’s part of my reason why I think state-based regulation needs to be fixed. Not replaced, maybe, but it has to be fixed.
TEDDY DOWNEY: And the last question, I mean, I always like to ask this because we do have a lot of law enforcers and regulators on this call. Do you have any recommendations for them of either what they should be focused on or how they should be prioritizing their time and their efforts to solve some of these problems, the opacity, the conflicts of interest, the potential insolvency of these insurers? What should the regulators and law enforcers focus on?
ROD DUBITSKY: Well, when I worked for the Federal Home Loan Bank, I wasn’t the one looking at the loans. I was a capital markets expert. But I sat with a group of all these loan examiners and they would sift through these pile of loans. And they would go through all the largest loans. And they would, with some precision, decide whether the savings and loan had marked them properly. And inevitably, they’d mark it down, mark it down. And they’d say, okay, now you’re insolvent because we think you’re over-valuing.
So, if you take some of these largest investments, whether they sit in Schedule BA, which is like the joint ventures and equity-type investments, or whether they sit on Schedule D, which are mostly fixed income or public equity, look at the largest, top 10 largest, top 20 largest. Look at the private letter ratings to see if you see a pattern of hiring a particular rating agency, and do a deep dive on those. Start with five or ten and do a sampling of them.
And going to the office is like bank examiner would do, and say, I want, you don’t have the paper files that you used to do, but on-site, look at, give them access to those particular files or get access to them. And I don’t know that, between state regulators and law enforcement, law enforcement, to me, gets into a bit more, I don’t know what you mean by law enforcement, but that’s, once they’re —
TEDDY DOWNEY: One thing that certainly occurs to me is that this whole shell game could be categorized as fraud. You’re already getting lawsuits for the private equity companies inflating the assets, and as a result, inflating the fees that they’re charging to their investors. So, there’s potential lying to the investors. There’s this very odd regulatory behavior where you’re exempting people from your own rules. Like, why do you have rules if you’re just going to exempt people from them?
ROD DUBITSKY: I think the rule exemption, yeah, go ahead.
TEDDY DOWNEY: And honestly, are they part of a scheme to defraud the policyholder? I mean, I think you could certainly at least poke around on the potential for corruption. Like, what is the explanation for these regulators to create these very, very obviously problematic exemptions to their own rules, and the overall scheme feeling like, hey, this is allowing for the looting of the insurance company, I mean, to the benefit of the private equity parent.
I think it feels like a scheme to defraud, and you’re already seeing litigation on this. You’ve already seen someone look into Walter. That’s a whistleblower in law enforcement, DOJ taking a look. I don’t know why all these other companies doing the exact same thing would not need some kind of law enforcer to or sort of like what’s their explanation for why they shouldn’t get a law enforcer to poke around? So, I don’t know if it’s necessarily criminal or civil, but to me, it feels like it merits it.
ROD DUBITSKY: Yeah, I mean, the best analog is in the BDC world where I’ve spent a lot of time calling out the valuations there. BlacRock’s TCPC is under federal investigation BDC is because of their valuation practices. And they mark loans from 100 to zero twice in one quarter. They mark down the NAV by 20% in one quarter. And I think this is true with the entire BDC industry, right?
So, just as they’re looking into this particular BDC owner for fraud, I think there are similar issues that they could look at. But there’s a long way, a lot you can do between proving fraud and proving mismanagement conflicts of interest, right? I mean, what do you call the $9 billion that Apollo is transferring to Athene? And what do you call the company, the independent value that validated that value for Athene and decided that 99.7 was a good price, right? Maybe that person who was hired by Athene to provide an independent opinion also needs to be looked at.
So just look at that. Start with that transaction, $9 billion of loans, and going from Apollo to Athene. And look at that and say, what was the process that was used to decide that was the best investment for Athene at that time and commit so much of their capital base to such a large investment from an affiliate, and what else was going on? If you audit those loans, I’m guessing you’re going to find a lot more trouble in those loans than it would be implied in the 99.7.
So, you can look at specific transactions and Apollo discloses, I think, any investment over 10 percent of capital is they highlight that. I don’t know if they do that or if that’s a regulation. But any large investment should be subject to a detailed onsite exam by the examiner. And if they don’t have the expertise, they can hire them, right?
The problem is in the case of ACAP’s Utah entities, they hired an outside independent valuation firm who put values on these loans much lower than the insurer did. But then the insurer said, no, they got it all wrong. Or they didn’t know what they were doing. And then they cast aspersions on that independent valuation firm.
So, because you don’t have the ability for 50 state regulators to have deep dive expertise, unlike an FDIC can or a Fed, the bank. The federal bank regulators, they can have a staff of regulators. When I worked for the Home Loan Bank of San Francisco, I was a capital markets expert. I was sent into Detroit to help there, the Home Loan Bank region of Detroit. Because they wanted me to look at a particular savings and loan there, right?
You can’t do that with the state regulatory system until you have multi-state failures and the states have to cooperate, right? If you have a single holding company with multiple state failures, as might happen with the Guggenheim, I don’t know if they’re going to fail. Maybe they can restructure. But that might be the largest example of a near-term risk, that if they can’t resolve their criminal investigation or their affiliate problem, they may and I call that Security Benefit Life, a completely different problem that nobody talked about. They have 25 percent of their assets, in something called collateral loans. And that sits in Schedule BA, but only has 6 percent capital required. And they were all affiliated and they classify them as affiliated. So, that wasn’t a classification issue, but they were all affiliated. And the NAIC changed the capital rules for that because they thought it was being abused.
But then they came in and lots and lots of donations to the local state insurance commissioner who was running for governor. They were one of the largest donors, all of these affiliates and entities. And I documented it in my article on security benefit. They came in and because it was one insurance examiner or regulator in one state, they were able to get that law delayed for a year and maybe even weakened. So, it shows you how easy it is to I don’t want to use the word manipulate, but I can’t think of a better one. How easy it is to manipulate the state regulatory decisions, as opposed to, you’re not going to do that to the head of the FDIC or the OCC or whoever the federal regulatory body is. That was just an example of state-based influence.
And in Utah, one more point and we’ll let you go to questions. They put out a 300-page report on ACAP entities, Sentinel, Jazz Re and Haymarket. They put out a 300-page report. I got that report. It is an unmitigated disaster, those insurance companies, if you believe the report. Go to their website now and try to get that report. You can’t. They pulled it because ACAP sued Utah and Utah agreed to pull the report. They removed the rehabilitation recommendation and they were in mediation. That’s been going on a year now, two years now.
And guess what? Two days after the South Carolina petition for rehabilitation, guess what happened? ACAP sued them. They petitioned for an automatic stay and they’re suing South Carolina, accusing the South Carolina regulators for the same thing they accused the Utah regulators of.
Now, how are these individual states going to muster the resources and the expertise to counter that and do they have the budget for it? But this is ACAP. Now, maybe ACAP’s right in South Carolina. Maybe they’re right in Utah. Maybe both insurance regulators were doing them dirty. But again, how do they respond? And can Utah partner up with South Carolina? Most of the stories on the South Carolina entities didn’t even mention that fact that ACAP has larger entities in Utah, who, by the way, provide reinsurance to the South Carolina entities. So, anyway, I’ll leave that at that.
TEDDY DOWNEY: No, I mean, it’s a great point that these companies think they’re above the law, right? They think they’re more powerful than their regulator. In some respects, maybe they are. If they can sue and the regulator backs down or the regulator doesn’t have the resources, what kind of dynamic do you have where you have companies that are completely unaccountable to the people really? I mean, these regulators are there to protect the citizenry. And if the company’s more powerful than them, if the company has more resources to go to court and litigate and just drag it out and not follow the rules, maybe at some level that explains why your state regulator ends up just doing whatever the company wants because they threaten to sue or they say what are you going to do? Push us into, try to push us into your resolution process. There’s no way.
ROD DUBITSKY: Yeah, and that’s why if you have some sort of umbrella regulatory body, number one, even like it’s possible a state regulator makes a mistake, not only being too lax, but being too harsh and they may be overly harsh and some mistakes may have been made in Utah. Maybe they were made in South Carolina. I don’t know.
There were some allegations of conflicts of interest or that they were out to get ACAP, whatever. But it’s more likely to make that allegation in a state-based regulatory system where it’s easy for mistakes to be made on the more conservative side. But far more likely it’s easy to make mistakes on just resolving way too slowly, seeing an obvious problem.
I mean, with ACAP, their private equity partner has been under criminal investigation from the FBI. I mean, that should be and for double and triple pledging, and I read the lawsuit for 777. I read the lawsuit. They admitted to double, triple pledging. Maybe they said it’s not fraud. It was an administrative error or whatever, but it’s a mess.
TEDDY DOWNEY: Yeah. Again, like I said, I could sit here all day. We have a lot of questions we didn’t get to, but we’re well over time
ROD DUBITSKY: Can we get a couple of questions?
TEDDY DOWNEY: Do you want to? Sure. We’ve got a couple of questions. We can stick around. We’ve got one here. How did you identify the $110 billion of assets on MassMutual that were miscategorized based on historical correlations during stress period of NAIC-1 level assets to NAIC-5?
ROD DUBITSKY: No, it’s a great question. It was basically based on categories of risk. So, for example, equitybacked ABS, I viewed that entirely as an asset category that is vulnerable to mis-ratings. And when I did that for Athene, I identified specific assets that I thought should not have been investment-grade rating, in fact, equity, not fixed income. So, that’s one category, equity-backed ABS. I included their equity interest in a subsidiary that consisted of Barings because of the risk of, the equity investment.
So, it was basically a categorization of risk, not a quantitative analysis of specific I don’t have that kind of data, but it’s basically a categorical. I looked at categories of risk that I deem have disproportionate exposure, exposes their capital disproportionately to that aspect.
So, CLOs, the private letter ratings, the equity-backed ABS, a few large they have their scheduled BA assets, which are generally riskier assets. So, it was based on categories of risk that I didn’t think had adequate capital requirements.
TEDDY DOWNEY: That to me seems like such a much better way to think about risk in these insurers. Is this a risky category that the rating agencies are probably getting wrong? I mean, like, that gives you a much clearer picture to my mind.
ROD DUBITSKY: Yeah, it’s a way to do it. And if you look at the rating agencies post, they have their risky category criteria. And they look at commercial mortgages. They look at below investment grade assets. But the problem is the rating agencies, when they’re looking at risk, they are forced to accept the underlying ratings.
So, if the underlying ratings are not provided by you, so, let’s say all these private letter ratings are provided by one of these smaller, independent, one of these smaller, independent companies, one of these smaller rating agencies which I think the data has shown, it’s disproportionately KBRA, Egan Jones, DBRS, right? And the fact that they’re smaller doesn’t mean they’re worse than the others. I’ve documented just as much on Moody’s and S&P and Fitch. But they have to accept those ratings as given.
So, when you see something that’s investment grade, that goes into Moody’s model to rate that insurer. And it’s by definition deemed not risky because it’s investment grade. So, yeah, if we had categories of risks that looked through the ratings and looked at the category of being particularly exposed, and if that was an agreed upon standard by the NAIC and look, they created this equity ABS category. That’s how I’m able to when I did Athene first, I looked I don’t think that category existed. I had to go through line item by line item and find similar risks. So, the equity ABS category was good job to the NAIC forcing them to break it out, foreseeing a risk..
And the next step is to force reclassification from Schedule D to Schedule BA, which means risk capital goes from 2 percent to 30 percent. If they look at those Schedule D assets and Equity ABS assets, and determine that those are really equity investments, reclassify them, right?
So, I think more robust category, categorization, but that’s a bit difficult and judgmental. And what I did for MassMutual people could say, oh, well, their equity investment in their Baron subsidiary is not risky and private letter ratings don’t mean it’s risky. So, but you have to come up with some way of determining risk. And that was how I did it for MassMutual. To the question, maybe a couple more we can take.
TEDDY DOWNEY: Yeah. Any red flags at PIMCO? They have been investors in massive AI data center loans since they were acquired by Allianz Insurance.
ROD DUBITSKY: Yeah, I used to work there. So, I know Dan Ivascyn , the CIO. Or I think he’s the Chairman now or CEO now. So, I know Dan well. I like PIMCO. I’ve been trying to track the Beignet risk. I thought that was just an enormous amount of risk they took. And I think they took 2/3 of the Beignet debt into their various funds and I’ve tracked some billions of it. And I’ve seen Beignet show up on I can search Beignet on our database and there are some insurance companies that own the Beignet debt. But of all the traditional money managers, they’ve been at the forefront. They’ve also been at the forefront of criticizing private credit.
TEDDY DOWNEY: Yeah, that’s one thing I was going to point out. They sort of sat out private credit as a trend.
ROD DUBITSKY: There was a chart that came out that had five different entities calculating default rate. PIMCO came out like 25 percent. So, they’re real on private credit, but they’re going all in on data centers. And I called them out when Blue Owl did a BDC debt offering and PIMCO bought the entire thing now, $500 million. I said, why did PIMCO do that? I said, did PIMCO like the investment or are they bailing out Blue Owl? Because Blue Owl plays a critical role in that as Beignet. Blue Owl, I think is the equity owner and they have critical decision-making roles. So, I thought, was PIMCO protecting their much larger $20 billion Beignet investment? Or did they really like the $500 million Blue Owl?
So, I don’t have enough on that, but I do see them popping up on a lot of these. But I don’t have an opinion on whether that strategy is reckless or not. And I haven’t seen enough of how those assets get transferred to insurance companies. And is it sitting on Allianz’s balance sheet because Allianz owns them? I’m not sure.
TEDDY DOWNEY: I guess that brings us to our final question here. How intertwined do you think the private credit situation is with the AI bubble? I mean, you talked about being an expert in trying to understand bubbles. We’ve talked a couple of times here about some data center projects and some other big AI related transactions. How intertwined is the potential AI bubble, to the private credit bubble?
ROD DUBITSKY: Well, the best proof of that was a CNBC interview I saw with NVIDIA’s Jensen Huang. And they had five investors who committed $500 billion to Jensen Huang, $500 billion, not million, $500 billion. And they all sat around the table.
And I think other than BlackRock and Goldman, they were all private credit/private equity. It was KKR. It was Apollo. It was Blackstone and I think Brookfield. And they don’t have balance sheet to make this commitment right?
So, to me, that’s the best proof that this AI bubble. Private Equity committing to investments that they know they can stuff into their insurance companies. Take QTS for example? A name that doesn’t come up a lot. Who owns them? Blackstone, So, QTS is one of the largest data centers operators. And so, they’re not buying the debt, they’re putting it on insurance balance sheets although probably also syndicating some of it.
The one thing I haven’t found is the smoking gun I’m looking for is to see where a lot of that shows up on balance sheets. I talked about two earlier Athene investments, the SoftBank loan and the SpaceX data center deal. That’s $5 billion. We’re, in fact, we’re looking at a way to create an AI related tag our database.
I have not found, at least in the insurance company balance sheets, enough to raise the alarm on. And it’s hard because you can see infrastructure investments. But infrastructure could be old line Amazon operated data centers. Or Google. Or Microsoft. So, it’s very hard to look at a label like infrastructure and classify that as AI. So, I have to be careful when looking at investment level.
But to give NAIC credit again, they said, they’re going to be looking at these data center investments and specifically looking at the credit rating. So, I’m wondering if there’s a lot more of this. And if it’s not corporate debt, there’s a good chance private credit’s involved.
This $35 billion deal, which I have an article close to publishing, was a Blackstone /Apollo deal, supporting Broadcom, Google, Anthropic deal, $35 billion. And there’s another $15 billion that stands behind that with these speculative grade data center operators that were former crypto mining operators. So, that $35 billion, entirely Blackstone and Apollo
TEDDY DOWNEY: That’s one of the reasons why I’m so interested to see what happens in the elections is because this data center issue has become so politicized. And if you get a lot of anti-data center policy makers, legislators at the state and federal level, it’s almost certain to me that these projects will get delayed at a minimum, if they even happen.
ROD DUBITSKY: It’s already happening, yeah.
TEDDY DOWNEY: Yeah, it’s already happening, yeah.
ROD DUBITSKY: The delays are up 400 percent. And I had speculated on another podcast that one of the reasons why they decided to slow down their model training what maybe was a legitimate concern over the apocalyptic tendencies of these next generation AI models but I think they realized they got way over their skis in these data center commitments and there’s no way they can actually carry them out or should carry them out.
So, I think they were looking for a pretext to dial back some of this insane frenzy of data centers. This SoftBank, I called out, I mentioned SB Energy. SoftBank owns them. They have 100 million in revenue. They have $100 billion data center commitment $100 billion data center commitment the largest one committed to open AI. So, how many data centers SB Energy has built? Zero. They’ve not build a single data center yet.
They are building they’re one of the most important companies building out the Stargate data centers, which is the most important part of open AI. I think they sat down in the room and said, guys, this has gone absolutely insane. The amount of time it takes to connect to the grid, the waiting period to connect to the grid, is five to seven years.
So, think about all of these finance commitment, all the debt being issued, you can’t even get a grid connection for seven years. Without a grid connection, you have no data center.
So, now they’re doing what’s called behind the meter data centers. What that means is they’re building their own de novo energy infrastructure. So, guess who’s very popular now? GE Vernova. GE Vernova, the largest maker of gas turbines, and they’re sold out until 2028. And you’ve got Bloom Energy, who’s another hot sort of AI related company doing fuel cell technology. And so, they’re looking on, they say, Bloom Energy isn’t going to build all this out.
GE Vernova is on a big backlog. And by the way, these communities are not going to be too keen on having all these gas turbines burning. And SpaceX’s Colossus was sued because they were unlicensed gas turbines polluting the air in Memphis. And they said, oh, well, these were on trucks. Therefore, they’re mobile. So, they got around the law and they agreed to move them sometime in 2027, right?
TEDDY DOWNEY: They’re on trucks, the gas turbines. Wow, wow.
ROD DUBITSKY: Completely right. But the communities are doing it independent of the elections. The communities are rising up. Even Texas put a pause on it. And Texas was one of the leading proponents of unfettered AI data center building out. So, it’s happening already. And I think, yeah, Democrats winning the House and possibly Senate is definitely going to give more power to states who want to push back on this.
One of the big, beautiful bills that Marjorie Taylor Greene opposed, one of the aspects, she wanted to retain state regulation of AI. And I don’t remember where the bill ended up, but there was big pushback against her for wanting the ability of states to regulate AI.
And with Democrats in, that’s another aspect of the data center bill. It’s not just the data center regulation. It’s the ability to regulate AI itself. And I don’t know where the state regulation of AI stands, but that’s another aspect of how the sands could shift.
TEDDY DOWNEY: Yeah, I mean, so, so, so much to cover. So, much of this is intertwined. Can’t wait to keep reading your stuff. Can’t wait to see you at our event, November 12th in D.C. Rod, thank you so much for doing this today.
ROD DUBITSKY: Sure, happy to be here. Thanks for having me. And looking forward to your conference in November.
TEDDY DOWNEY: And just before we wrap up for everyone, if you want more conversations like this and you haven’t listened to the other ones live, you can get access at our private credit crisis podcast series. Also, we have a new series on the election outlook for 2026. Look at the midterm elections, what they could mean for policy markets and private credit. The exact thing we were talking about today.
ROD DUBITSKY: And by the way, you guys do awesome work on the insurance private equity, some of the most detailed articles that I’ve seen. And they don’t get enough attention. But some of the like amazing amount of details you guys are putting out on this stuff.
TEDDY DOWNEY: Thank you so much. And I was about to say, we couldn’t do all this work on private credit without the pioneering work from Kim Geiger and Lisa Epstein, the two people leading the charge on our private credit coverage that Rod just spoke about. So, thank you so much to them. Thank you, Rod.
ROD DUBITSKY: Sure.
TEDDY DOWNEY: Thanks for being such a good thought partner on all of this with us. And thanks everyone for joining the call today.
ROD DUBITSKY: Okay, cheers. Thanks, bye-bye.
TEDDY DOWNEY: Bye-bye.
