Invest Like the Best with Patrick O'Shaughnessy
00:03:29 · Vlad Barbalat
[00:03:29] S2: The thing is the balance sheet of one of the largest insurance companies in the world, one of the most diversified insurance companies in the world, Liberty Mutual Group, which has two primary insurance businesses that ultimately feed the investment platform. First is the one that probably most are familiar with, the Liberty Jingle, which is our personal lines business, one of the largest in The US, that of course is the home and auto component of our business. And then there is the business that is much more global in nature, and really serves a sophisticated set of companies, brokers, partners providing commercial and specialty insurance across many domains of business. Those two insurance businesses ultimately feed an investment platform that takes the reserves as well as the surplus capital of Liberty Mutual Group and invests it for the benefit of our balance sheet, ultimately for the benefit of our policyholders, so that we can ensure that our promises are always met and have the financial strength behind them. We are about a $120,000,000,000 in capital and what's interesting about our platform is that it allows us an incredibly unique way of behaving as investors, which is to say we are focused not on any form of third party capital, which has lots of benefits but also lots of challenges when you manage money. And it allows us to think about investing from a long term perspective and that allows us to do the right thing not the expedient thing. It allows us to maintain what I would describe as investment hygiene, that is one of the most difficult things to do when you're managing other people's money. The other part that's quite unique is the ecosystem that we're in, which allows us to continuously grow our capital base in the service of our policyholders. We are not driven by shareholders, for example, whose priority is return on capital in the form of dividends and buybacks. That's not part of our structure and it allows us to, again, think about making decisions that are the right decisions, not expedient decisions.
00:05:34 · Patrick O'Shaughnessy
[00:05:34] S0: Maybe explain one level more why the insurance idea is so powerful. Very famously, Buffett built a big chunk of Berkshire's success on this idea that if you have a sort of insurance part of your business, you control this float, and that that's this magic access to capital, and creates this permanence that allows you to do things others can't do. Maybe build that bridge between sort of the Buffett way of thinking, and how it feels to actually operate this thing.
00:05:58 · Vlad Barbalat
[00:05:58] S2: What really is interesting to me is how insurance is one of these industries that serves so many different purposes. And the way I like to think about it is that one side of our business and one side of our balance sheet is all about protecting, whether it's an individual, whether it's a business, and syndicating that risk, allowing risk to be taken by the people in the world. And so we have a very appropriate way we think about that at Liberty. We say we want people and businesses to embrace today and confidently pursue tomorrow. That's what the insurance part of our business does. When we sell those promises, when we take in those premiums, we then move them to the other side of the balance sheet, and we do something else that's really interesting for the economy and society. We invest that float as Buffett would say it, but ultimately invest our policy holders premiums in order to grow the economy, to support the economy, invest in critical infrastructure, fund entrepreneurs, create jobs. And so where we sit in the economy is quite a unique place. We do things on both sides of our business that allow us to protect and now create the foundation of commerce, and at the same time grow the economy. That's a unique spot.
00:07:13 · Patrick O'Shaughnessy, Vlad Barbalat
[00:07:13] S0: So coming back to this unique combo, so you you were providing the value through insurance, hedging people's risk, one way to think about it, that creates this pool of capital, a $120,000,000,000 that you can then, at least some portion of it will get into that, invest and support the growth of the economy, etcetera, creation of jobs. Break down the 120. How much of that is tightly controlled and has to be a certain way because it's heavily regulated? How much of that is more open? And then for the open portion, how do you think about how to allocate it? It's a lot of money. It's one of the bigger investment platforms in The US. It's a challenge, that's a lot of money to put out. Something that's gonna move the needle for you needs to be pretty big, I'm curious how you think about that. Break down the one twenty for us. [00:07:53] S2: One twenty is a snapshot, I think that number will be bigger next time we talk a couple of years from now. [00:07:57] S0: It was bigger than last time we talked.
00:07:58 · Vlad Barbalat
[00:07:58] S2: Yes, exactly. So let's talk about the 120. You could probably think of it as roughly 70 to 75,000,000,000 of that is reserves. That could be described as tightly managed, again going back to this notion, of course you want to make sure that whatever happens in the investment portfolio, you will always be in position to fulfill that sacred promise of writing an insurance policy to your policyholder. Even there, we have quite a unique approach. We are not just buying investment grade bonds, putting them in the drawer and waiting for that coupon to come once a quarter, and then ultimately maturity. That can be a sleepy boring way frankly the way this type of capital pool was managed historically. We're quite innovative, we do lots of different things that allow us to be a liquidity provider into that marketplace, but that's about $75,000,000,000 You could think about the rest as broken out between what we describe as growth credit and growth equity. Those two pools of capital are growing as a function of our surplus, they are a way we can be a full service invest capital provider into all parts of the economy. What we've done with our credit business is taken an approach not of public private, which currently of course gets lots of headlines, but really what is our levered corporate credit business? And we've put those parts together. So our public credit, high yield leveraged loans business sits with our capital solutions business, sits with our direct lending business, and with our partnership structure that's focused on credit. All of them sit together, have one platform, one reporting structure, because we believe the expertise frankly is what's important here.
00:09:45 · Patrick O'Shaughnessy
[00:09:45] S0: And you'll do direct deals, you'll do manager allocations, you'll do big partnerships, whatever.