Invest Like the Best with Patrick O'Shaughnessy
00:17:46 · Vlad Barbalat
[00:17:46] S2: got ideas and you're looking for capital partners, one is we always want to get that phone call. By the virtue of what I've described before, our approach to the way we partner with people, these kinds of things come as referrals rather than a barrage of cold calls, and that in itself is super helpful. What are we interested in? There's a very wide waterfront of things that we do and we already know that. If something falls outside the waterfront, there's obviously going to be a higher burden of proof on that. We may not have the expertise. We may not be able to assess or find a fit in the book, but that's more rare. What is more interesting is, what's the unique proposition that is being brought forward? By the way, those are not frequent. It's not easy to be original in many of these industries and sub industries. But we're willing to back people, we're willing to take a risk on people we believe in, if we see integrity, if we see an idea that makes sense, and if we can find a true partnership that has the ability to serve both the originator in this case, and liberty for the long run. That links to something very important to me in my time in this role, which is to say, what possesses a professional sitting at a stable large insurance asset manager to take entrepreneurial risk. That's a cultural dynamic and one that shouldn't be taken for granted because the easy answer is, this falls outside my area of comfort, why in the world would I take the risk? We have been incredibly purposeful in developing a culture where people have the incentive, the types of people that would be curious and interested, and have the governance structure in place to actually take those risks. And I view that component of the organization as one of the largest and most important responsibilities I have. To make sure that we have the people that will actually engage the right way, because the first time someone turns that call away or behaves in a manner which doesn't demonstrate curiosity and entrepreneurial spirit, those referrals that I talked about earlier, they'll dry up because the reputation is built on that entrepreneurial spirit.
00:19:58 · Patrick O'Shaughnessy
[00:19:58] S0: Why take the risk at all? If I think about the $120,000,000,000 again, there's a long history of insurance being pretty sleepy, investing in bonds, earning a small spread on the float, no one gets fired, nothing goes wrong, you can still be a great insurance provider. Why bother at all? Applying your craft and your career in this space versus like a more traditional asset manager? Why is the juice worth the squeeze?
00:20:22 · Vlad Barbalat
[00:20:22] S2: I really do believe what I described before, is really unique place to sit in the financial system, in the fabric of the economy. You sit and you support the economy in two different ways. But specifically, why not just invest the whole thing in the bond portfolio and go away? That would prevent you from ultimately being a balance sheet that can adopt new technologies because that's obviously a constant in our world. It is a balance sheet that is able to adapt to the evolution of the economy. Risks are evolving all the time. The risks that insurance companies took on twenty five years ago are very different than they are today, and for sure they will be different tomorrow. I'll give you an example, data centers. This is a totally different scale of asset and values than of an asset that have existed before. Insurance balance sheets aren't large enough to just absorb that. That's why you have an extension into all forms of third party capital coming in. But that's an example of where if you build a fortress balance sheet, you're able to do things that others will not. How do you build that fortress balance sheet? Through two main engines of profitability. One is the underwriting part, but that's a thin margin business. And then through the asset side, where if you simply take the approach of let me buy a 4% investment grade bond or 5% investment grade bond versus trying to achieve a 7%, 8%, 9%, 10% return on the totality of your portfolio. It's all the difference in the world. It is a competitive business where the amount of capital you have will dictate the opportunity set that is available to you both on the liability side and the asset side.
00:21:56 · Patrick O'Shaughnessy, Vlad Barbalat
[00:21:56] S0: In a mutual structure. I would totally understand it if I was an equity shareholder, you can invest this at a high rate of return, like that's good for me. Maybe close the loop for why that's good for the holistic thing. [00:22:07] S2: I would actually reverse that. I think as a public insurer, you're not likely to be able to pursue what we're doing because if you're a shareholder of a public insurer, you can bifurcate these two things and say, you have historically not been a sophisticated investor, you've been much more conservative. What I ask of you, management, is to deliver me a very consistent margin on the underwriting. I'd like to get as much capital back from you in the form of dividends or buybacks, I don't need you to recreate an investment firm on the asset side of your balance sheet because if I wanted you to do that, well instead I can just take [00:22:49] S0: I could do it.
00:22:50 · Vlad Barbalat
[00:22:50] S2: I could do it. That's a classic example of conglomerates. Shareholders don't generally welcome that approach. And it's especially difficult if you're starting from scratch. Why should you have the right to build a world class investment organization if you're not really starting there? I think the public sphere therefore operates differently, and is held to a very very tight standard on the underwriting side. Now, the flip side of that, if you're a mutual, you don't have the forcing function of shareholders to ensure that you are operating at your best. But that's an optional feature of mutuality, that's not a requirement. The only requirement is that you can't raise equity. We've made the choice that we want to be an exceptional operator, and that includes exceptional underwriting results and exceptional investment organization. How it benefits our policyholders? Well first and foremost, again, are going to be there through thick and thin when inevitably trouble strikes. The other component I mentioned that our insurance businesses are incredibly diverse. So if you think about other large insurers, take Progressive, incredibly successful company, lots to admire, but they're very focused on a particular vertical, motor in The US. They're incredible at it. Those risks require a certain types of balance sheet. They're not particularly long tailed. If you think about our mix, we have risks that can come back from twenty, thirty years ago and be very fat tailed. It is really really important to differentiate the balance sheet that company like Progressive needs versus a company like Liberty Mutual. Our tails are fatter, our balance sheet requirements are very different. That goes back to this what we describe as a flywheel. If we do well for our policyholders in terms of underwriting, efficiently creating various products that tailor and suit their risks, and then invest our capital well, we can perpetuate the strength in the service of our policyholders.
00:24:43 · Patrick O'Shaughnessy, Vlad Barbalat
[00:24:43] S0: If I were to sum that up, the success on the investment side unlocks product or service quality for policyholders. [00:24:51] S2: Product breadth, future risks that currently may not be visible to you but are going to evolve, we can be your partner [00:24:58] S0: And risks some of that you can underwrite that maybe others couldn't because of the nature of the balance sheet. Correct. Got [00:25:03] S2: it. At the most extreme, you could think of Berkshire as being that. People think about Berkshire's insurance operations, the most visible obviously is GEICO, the original. But they are the insurer of last resort very very often. The reason they can do that is because they've got this incredible balance sheet. Berkshire is a universe of its own, particularly in the way shareholders have regarded Berkshire not asking for capital back. But that's an extreme example of what you can do when you have a balance sheet like that.