This episode is about diving deep into a comparison between stock market arbitrageurs and specialty insurance underwriters. The idea for the show came from the guest, Rich Derr, an actuary at Nationwide Insurance Company's specialty division and I love nothing more than falling down a well with someone comparing financial and insurance markets.
The original paper that inspired Rich is called The Limits of Arbitrage and doesn't really contemplate insurance. That's our job! I learned a lot in this conversation, actually, and some of the insights will stick with me a long time.
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Speaker 2:2:15my guest today is rich dirt, which is an actuary with nationwide insurance company and a specialty division. This episode is an idea that rich pitched me a little while ago, what I'm going to call not unreasonable deep dives with richster. This will beat up art. This will be our pilot episode. Rich, welcome to the show. Thanks. So the idea this week is to study arbitrage as it exists, I guess, in the financial markets and apply it to specialty insurance. Is that right? Correct. It's a, I found this paper read through it and it was surprised that the relationships that I've found between arbitrage and specialty insurance and we'll put a big ticket link up to that paper. Of course the paper is called the limits of arbitrage by Andre Schleifer and Robert envisioning this papers. That is when, what year was that? Nineteen 97. So it's a little dated. Maybe truths are universal.
Speaker 4:3:01Yeah, I, I think it's still very, very applicable to what we do. Okay. So, and, and maybe we, maybe we can start off with a description of what arbitrage is and in the financial markets and the financial community and kind of what that, how that idea is important, why it's important. Sure. So you, you have sort of two definitions of arbitrage that you're working. You have that textbook definition that we as actuaries learned early on when you're looking at kappa and it's this idea that you can buy an asset at a low price in one market, sell it, and the other, and take advantage of that price difference. You're recognizing the profits immediately and there's no risk associated with it. That's a, that's not really the reality of how our charge works though. The reality of arbitrage is that when you have this price difference on one market, you borrow the asset to sell and the other market you borrow money to buy an asset and now you're holding a position and you don't actually make money until those prices converge.
Speaker 4:3:57And that's important because there is now credit risk involved. You now have to put up capital to hold that position. So the more realistic definition adds a lot of risk to arbitrage. Do you remember the first time you ever came across this idea arbitrage in your life? Probably the movie arbitrage, but, uh, I don't not familiar with that movie. I don't even know. There's a movie called arbitrary I think Richard Gere movie. Yeah, from forever ago. Wow. Do you remember what happened in that movie? I do not say, but I do know of an esoteric concept to put up a list Hollywood star in front of. So yeah, it's a strange concept. The Fun word I really enjoy saying partly. I totally agree. I remember the first time I heard it was when I was in university, I was in a finance class and the professor said, there's this thing called arbitrage, and I had the same reaction.
Speaker 4:4:44I thought, well, that's fancy French. Nice. And actually as I was preparing for this conversation, I looked it up, the word arbitrage, the etymology of it. Where did it come from? It is French, of course, and the root is really the same as arbitrator arbiter to decide and there's this paper that was written in like, I dunno how long, 18 something rather by a French economist about the arbitrage being the decision point or sorry, the act of making a decision between alternative investment ideas. In this case, it was where to where to invest in British pounds and so what was interesting when you, when you first proposed this idea to me, I always had this idea of arbitrage is being in the purest financial conception of it. Like you mentioned a second ago where you can have a risk list or must be a riskless profit and sort of as platonic ideal of an investment decision, but in its original conception it was actually just about just picking the best of available options and so it was a very, very pragmatic kind of idea at first.
Speaker 4:5:36Which is nice because we're kind of coming back to that with this paper really about choosing the best option and then I think if this paper is and in some ways revealing some of the flaws and actually the problems with the way it's conceived of in finance textbooks. Exactly. And this paper is getting at the idea that that arbitrage. If it. If it was perfect, you'd have very efficient markets and the fact that it's not perfect. And because of the structure of the. Of of how the capital setup, which we'll get into a little bit, you end up with inefficient markets and I think that correlates closely with sports, specialty insurance and it's why we have underwriting cycles or one of the reasons I believe we have underwriting cycles. So maybe to get into that a little bit more, let's talk about why arbitragers and perfect in the financial markets concept, but it sure.
Speaker 4:6:21So the way because of how arbitrage is actually set up, the reality of it where you have to put up capital. Well let's first little bit of structure around it right here. So we have three, three different parties. We have noise traders. If we're really needs a specialty insurance, that would be competitors. If you're. The arbitragers would be like our specialty insurers that I was talking about earlier and then we have investors and that's whoever controls your access to capital. So you have these three different parties and this is getting into the agency structure of, of arbitrage. And so now that we have these. I was gonna say agency in this case is an important idea because that's a relationship between the actual arbitrager, which is this, let's call it a guy, if we can be gender non neutral about it and it's capital providers and so you have the people who are going to give them capital and and they're gonna say you do what you need to do and we don't really understand it, and so there's an agency relationship there in particular.
Speaker 4:7:14Exactly, and that knowledge gap is one of the large problems that you're going to have with with arbitrage and it ends up being an issue in specialty insurance as well. You have this knowledge now, knowledge get difference, but arbitrage ends up not being perfect because if we look at it in a timeline, so at the initially there's this opportunity, there's this mispricing that pops up in a, you know, at time equals to the prices. They will hopefully converge you cash out of that position and everybody's happy. You make money. But the reality of it is, is that the priest is my actually diverged and if the press is diverged, that means the arbitragers. Now actually recognizing a loss, they have to put up more capital. They have to recognize that loss. If they don't have the capital put up, you have to go back to the investors and say, hey, look to just hold this position that we still think can make money.
Speaker 4:8:00We're going to need more capital. That was capital calculated in this way. Do, do you know? Uh, I don't know how they decide how much capital should be like it's going to. Capital is always waited to risk. Right. It's a concept that we're pretty familiar with in our business and I guess that there's a perception that the risk increases as the position goes more negative, which makes sense. Yeah. You'd have more. I guess it'd be more credit risk there, right? You'd have to come up with more money. So more credit. Residential bosses, larger. Yep. Right. If you were to liquidate the position at the wrong time, and I think of if you, if you have a, the notional exposure or maybe maybe the immediate exposure to loss goes up, then you're going to have to have some percentage of capital, I guess allocated to that in a case it seems riskier.
Speaker 4:8:40It looks riskier and that's the real core insight, isn't it? When it, when, when the position goes farther away from where you think it should be, it looks scarier. Yep. And especially if you don't have that specialty knowledge, you're looking at that position and as the investor, you're going, wait a minute, you're telling me everything's fine, but you're, you're recognizing night company Jimmy for more money. And where it gets even more fun is the arbitragers are saying not only that, but the opportunity is actually better right now. And so we need more capital to go heavier into that position. Um, and that's, that's the difficulty of the arbitrage. And I think that that actually relates a little bit of specialty insurance as well. Yeah, of course. That, that sentiment is self serving. Yes. Right. Yeah. And so, you know, there, I mean everybody who's ever traded into the financial markets, which is probably a lot of actuaries recognizes the feeling of when you make a bet and it goes against you and you're thinking, do I need to revise my opinion of what's going on here?
Speaker 4:9:27And you don't really want to, but now there's this whole truckload of cognitive biases that are pouring all over you here, right? So on the one hand you have the sunk cost fallacy registering, I, I mean, you know, and I've spent quote unquote all this money to get to this position and why I got to hang on for longer and that's wrong because you should always evaluate the position based on the profit and loss opportunities in that moment. There's this, there's this, um, availability bias to use early information that has available right now is like, that's going down. So therefore, is it going down that's fighting against that. It's probably pretty hard to keep your cool in such a position. Right? And so you're, you're pushing for this and you're saying, I feel like I'm writing. So you pushing for that additional capital to really capitalize on that moment.
Speaker 4:10:09And on the specialty insurance side, I have that, that same thing where maybe we want to enter into, maybe we're not already in the position, but we've, we recognize a line of business we want to get into. There were some serious losses that have occurred in that line of business in the past, but we think this is the moment that you needed to jump in, is that moment for. There's a lot of other competitors. The markets hardened, a lot of people have pulled out because of past losses. A great example that I had of that is a, uh, if you've heard of these fannie mae and Freddie Mac deals that they're doing right now, they're buying capital right to, to. They're buying reinsurance exactly against a systemic issue in the housing market, big downturn in prices, and then they will lose a lot of money. Very classic aggregate deal.
Speaker 4:10:49Yeah. So they're, they're, they're bunching up all these, these mortgages and everybody's familiar with mortgage backed securities. It's this point with the big short movie, and fortunately they're still doing that. But they're like, there's gotta be another way to transfer risk and not surprisingly, a great way to transfer risk is insurance. And so this opportunities come up where if you partner with the right people, you can get into this business, you buy a default layer rather than a last layer. So instead of 1 million excess of 1 million, you'd be covering like the one percent to two percent default layer. So as soon as the default of that portfolio hit that one percent mark, you're responsible for the losses, the market, the number of competitors are actually restrained on that line of business. There is only so many competitors that can into it. There's a process to get involved.
Speaker 4:11:34And once you reading this, you mean the reinsurers or fannie and Freddie, the reinsurers, Fannie and Freddie control the number of reinsurers that get into it. Right? So we thought it was great opportunity. We went to our upper management to try to pull them in and get into this. And that financial crisis loss is still hanging over everybody's head. It's very scary. And we had other. A credit risk is a huge, huge issue. Especially for a company like nationwide has the whole financial side, but as my job as the actuary, I thought it was my job to to bridge that gap. I think one of the most important jobs of an actuary is bridging that knowledge gap saying, look, I did the analysis, here's what I, here's what I needed to do and here's what we should be doing and trying to convince them to to jump into the line of business
Speaker 2:12:14[inaudible] and I think the key link here between the arbitrage idea and the specialty, if, if, if I ever. I'm thinking this right, is the idea of expertise and the idea of it not being obvious what you should do or how to make money in this, in this, in this line of business to people who aren't in it. Is that right?
Speaker 4:12:32Exactly, and so the arbitragers have that specialty knowledge, especially if you also have that knowledge and what gets interesting. The link actually is stronger than just that. It's also, I think related to the underwriting cycles. We see, so the markets that you see a cyclical. Yeah, exactly. Running profitability cyclical as is the profitably of the stock market. I guess it will. The idea is the, your
Speaker 4:12:55for an arbitrager your biggest opportunity happens whenever there's that largest convergence divergence in the prices and that's when everybody's the scariest to get into specialty insurance. Uh, it's sort of the same thing. You have that big loss and it's scary to jump into it, but that, that might be your best opportunity to make money. And I got to be careful when I say that, right? Uh, you don't want to just jump in. You have to understand why the losses were there and making sure that it's a still a good opportunity, that the market is hard enough that you can make the money. Uh, but having that specialty knowledge is key.
Speaker 2:13:25[inaudible]. And one of the things to me that, that is that I'd like to ask you about on that comparison is with insurance there's, you're not as constrained about the price that you want to charge. Right? And so it just kind of think as I was kind of pondering this, thinking about the where, where does this comparison fray a little bit at the edges and one of them I think is maybe that the, this in the stock market, you have a, you have a price that you're willing to, to pay I guess, and you can, you can't quote, are you going to see, can I guess you can offer a bid for a stock and offer to pay it and you sort of wait around for it to not come in. Um, and I suppose that maybe maybe I'm totally wrong with that because ultimately an insurance you're able to, well you have a price you think is right and that price is based on whatever your expertise is and you can wait around for somebody to give you that price. And then the, the scary thing for the capital provider is does this person know what the right price is?
Speaker 4:14:21Right. And I mean that's, that is the job of. They actually write is the firm that find that price if fundamental analyst and a. what's that like a fundamental analysts. Exactly, yeah, right in the stock market. Yep. Conception of it. So how did the capital to decide whether to give you money or not? So that's one of the key assumptions of this paper and it gets into the performance based arbitrage, a sorry, provenance based allocation. What they do is how they decide who gets the capital as they look at the historic experience of the arbitrager because the strategies, the arbitration so difficult that they don't really understand it. So they'll look at the historic results and say, hey look, historically you've done great, you're going to get capital. Historically you've done ma, you don't get a lot of capital, but that kind of provides a disconnect, right? Because what you should be looking at is the expected results. It's fantasy football time. So just using that as an example, like if you just used the last year to judge what the players are going to do next year, you're gonna you're going to lose. You need to. You need to look at what's the expected results are and that's how they're making the capital decision.
Speaker 2:15:21Yeah. So the, the capital providers, as I was reading the paper, the one of the key assumptions of their model there is that for the most part, they're coming with an idea, a preconceived notion of who is better or not. They're called bz ends in this manner. They are more or less updating that idea on past performance. They're saying if you as an arbitrager, I'm not developing opinion of your strategy, but merely developing an opinion of you as a practitioner in this business based on your track record, it doesn't seem too crazy, right? Except that sometimes as we were pointing out earlier, the market can move against you and then, and then what do you do? Because their track record is terrible when they've lost a whole bunch of money.
Speaker 4:15:58Right? So that's, that's again the job of the actually the judge, a job of the arbitragers to go there and convince them that, look, we understand that this went wrong, but we need you to keep providing the capital so we can go harder. But, but getting into the performance space thing, I think that's. That happens on the insurance side as well. You look at maybe not specific to a company or within a division within the company, but you'll look at a line of business and you'll look at the historic results and this is how you ended up with with underwriting cycles, right? You have the. You have a line of business that has been performing very poorly and she like, well, we're not gonna. Get in that line of business will at some point everybody says that the market starts to harden. Everybody looks at all of the markets hardening and then they get into it, but then you end up getting into rate isn't starting to soften again, so the the buy high and sell low. Exactly, but by using the historic as your a priori, you're always trailing. You're your best possible results and I think that's one thing you need to keep in mind when you're in a specialty insurances. When you see your opportunity, you really need to jump on it.
Speaker 2:16:58So do you think that that's. Is that A. is that a flaw in the market? You think in some way of of this sort of misconception or this. I mean, I can only call it evaluation performance because you're the only looking at their past performance and it is, it is, and I think maybe the key idea of the paper is that there's a fundamental tension between the capital providers perspective of the prophets and the arbitrary jurors perspective of the prophets, and that really dilutes the potential impact that arbitragers can have on the market because their capital of keep pulling the rug out from underneath them every time they think they have an opportunity. And that enables ms dot pricing or facilitates mispricing actually.
Speaker 4:17:33Exactly. Today, it's what causes the market to be in touch with the arbitrage, expects us to make the market efficient. But if you keep pulling the capital ends up being inefficient. And then even the worst case scenario, this gets into to gambler's ruin A. Yeah. Explain what that is. Yeah. So the is, uh, it, it's not a big deal. You can take forever positions in these as long as you have infinite capital. So gambler's ruin is sort of the same idea. So if you have one guy at a, I'll use a roulette wheel, uh, you're, you're at a roulette wheel and you take the genius strategy that everybody's come up with at some point, right? You put a dollar down on black, you lose, you double it, $2, four, eight, 16 and so forth. Uh, you can't, you can't lose because at some point you'll eventually win.
Speaker 4:18:14But the reality of it is, unless you have infinitely deep pockets, at some point you're going to run out of that cash. So if you go to the table with $500, you lose a couple of times in a row, you go in for that $500 for your pocket, it's going to be empty and now you have to recognize the loss and you're not going to be there for whatever the upswing. And it's Sorta the same thing with the arbitragers, right? You're there, you hold that position, you're putting up capital waiting for it to improve. But eventually the investors are going to say, well look, you're not getting any more capital. Now you have to close out that position at a loss. Even if you are convinced that the prices are going to converge at some point, and that plays out in especially insurance or an insurance market as you're standing in a line of business, even though it keeps losing your money.
Speaker 4:18:52Exactly, yeah. It's, it's, uh, things are starting to turn a, they don't look great, but if you understand the reasons why, and you can explain that, uh, you can say, look, I understand it's a bad, but let's try to manage this, manage the exposure because there is a whole other host of reasons why you'd want to stay in the line, but at some point the market will harden and you don't want to be starting from scratch again. You want to keep those relationships, so you need to stay in there. You need that capital to continue to rate. Even if it is you're, you're losing money. You just need to manage that loss. The market turns and then if you've done it correctly, you have a lot of capital to really go at it. Right. As the market hardens, it's a little frustrating in some ways, isn't it even talking about it because how do you know, like let's say you're a capital provider and this is the, this is one of the key observations in the paper is due to the limited information that the capital provider has about what strategy is good and what strategy is bad that they have to behave this way, but the paper doesn't vapor simply to me anyway.
Speaker 4:19:50My reading of it presents it as a problem. It doesn't necessarily say that there's anything we can do about it. You know, there's seems like this is just sort of reality of dealing with people with expertise is that you either trust them or you don't, and after some non specified amount of time, your trust just evaporates. Then he pulled the plug. Yeah, exactly. It's, uh, it's tough. And the truth of it is as the expert, you don't truly know. Sure. Especially insurance. Like I'm confident that I have an idea of what could be happening. Like we're, we're in a lot of public dno right now and a frequency seems to be uptaking and we're trying to get a handle on and it's very important that we figure it out because we don't want to keep taking losses were still running profitably, but we need to figure that piece of it out before it becomes a problem and we need to make sure we communicate it clearly and everybody understands exactly what's going on. It's a, it's an interesting problem. It's actually a lot of fun digging into the data and really figuring out what's going on. But it's, it's, it's tough because I don't never become 100 percent sure if I, if I am right.
Speaker 2:20:51In your heart of hearts, do you think that the expertise is undervalued? So do you feel that for the most part is in your experience that capital providers pull out too early in those situations?
Speaker 4:21:06Uh, so far I've lucked out. They've not had. They'll stick with you and a hold out with you and give you the benefit of the doubt for, for a good while. Uh, which is, which is great, right? They, they, they have my back, they trust me and it takes it a whole entire team to do that. Like I can't do that alone as they actually have claims that I talked to, they helped me with this. I haven't talked to the underwriters. They, they helped me with this. It's not just the actuary on their own out there. You have a lot of support which is nice.
Speaker 2:21:32And so generally speaking though, you think that this is your, that you were lucky or your is your experience better you think than other folks because I guess it comes down to you establishing reputation over a certain period of time and, and others may or may not be able to do that. That's simple as that.
Speaker 4:21:50Yeah, I think I, I would guess that this is the standard that they're willing to take a chance on things as long as you have the expert out there. Uh, that being said, uh, I was actually pretty new into my role. One of the Fannie and Freddie Mac stuff came up, did lots and lots of research. We ended up pulling out of the line of business and I think that was one of the Times where, uh, not, not having that experience of being new to my position kind of hurt me because the person I was replacing, she had all the relationships with a lot of these people whereas I was coming in and I think a lot of it was like, who is this guy? So it can happen, it can, it can result in and then pulling the capital, uh, maybe, maybe prematurely. But again, it wasn't just that happening exactly. There was lots of other things that were happening. Right.
Speaker 2:22:30And it was still though a leap of faith for let's say you are young actuary to get to make a call. And I think this is another thing, it's those addressed in the paper which I found interesting were they said that the young or the new fund a new art patrol, Azure, an inexperienced arbitrager and this in this case, defined as somebody with a long track record has a disadvantage against those with a long track record. And the reason is that capital providers, you know, if you have this call it lagging indicator of quality or the you're averaging over a shorter time period and you have a big downswing and your profitability, the average with a big negative number in there deals negative pretty quickly, but somebody, the long track record, you're averaging over a longer period of time, you're seeing that they have a, a larger more credibility I guess is the word I'm looking at. And so they have a, they have an advantage. There's an incumbency advantage amongst arbitragers for attracting capital because if you're doing it for a long time then you are better off.
Speaker 4:23:24Yep, exactly. And I think that's, that was exactly what happened in, in that scenario. It wasn't so much that I had a, a negative history is that I didn't have a history absence
Speaker 2:23:33of it. Yeah. Yeah. That that actually in my mind, I had a, had a bug me about that a little bit and that was that I thought the usual progression for somebody who does well and attracts in particularly in the financial markets, but maybe the case in other, in any insurance too is you wind up with the strategic scope creep and so you wind up doing other things. I went to this talk by uh, what's his name again? John Paulson, I think he was a famous financial crisis. I think he might've been in that big short book for making a lot of money betting against the betting against the housing bubble. Right. So betting on the housing downturn and he made it an huge billions of dollars. And I went into it. I went to a talk. He hosted or he, he spoke at in 2010 I think.
Speaker 2:24:20And it was interesting because he got up there and he started talking about how they gotten into all these new investments, investment ideas, new funds that they've sponsored. And they have the main fund which is the one that made all that money. And then they have now there's a gold fund and they have a tech fund or whatever it was, and I remember sitting there and listening to the arguments for kind of why it was amazing that they're doing all this and I thought with a gold fund I was like, that seems to me to be awfully an awful, awful lot like a fad. Everybody's going into gold because they think that goal is going to spike because inflation is going to spike. This is pretty, pretty simple causation, causal relationship. They had their between the monetary loosening of the Fed, buying all this stuff and increasing the money supply or allegedly so and then inflation therefore then going up therefore then the spike in gold prices.
Speaker 2:25:06That was a big bet he was making and are seeing the audience thinking does he know about this? This is a pretty like pretty big picture macro economic thing. And I was kind of skeptical and I sort of got this feeling of Hubris consenting it from the audience that he was somebody who had made a lot of money in something. Maybe even lucky. Maybe not, I don't know. But had wound up putting a ton of cash and credibility into this other fund and turns out later on it was a terrible idea and he lost tons of money and I don't know what he's doing now, but the, the shine is coming off his reputation because it Hubris, you start believing a little bit more of your own press and moving into the things. And so kind of all becoming back to those observation from the paper whereby the experience manager attract more capital. It has a better track record. I wonder whether there's a feedback loop there, but the experience actually makes them think that they can do more and then they go and do dumb things and that actually detracts from the reputation ultimately everything.
Speaker 4:25:53No, I think that that's definitely true. I was actually listening to a podcast. I wish I could remember the name of the economist. What is, uh, he, he ends up being looked over pretty, pretty commonly a, he made a lots of grief theories in 1929. The only thing he's remembered for is nine slash 29. He said, oh, the market's going to plateau. And it crashed, and now he's never, never remembered. But I think that's, that's definitely something that happens is you start to believe your own hype, right? You're, you're doing well and you're doing great. So you're, you're trying to do more and more and more. And maybe you're trying to turn things that aren't really opportunities into opportunities. And it's gonna. It's gonna bite. You have insurance to a 100 percent. It happens in insurance. Uh, you, there's, I think specifically it would happen in lines that you're already confident in.
Speaker 4:26:34There is a, you're seeing lots of profits. I want to keep a sort of vague here. Yeah. So you're seeing lots of profits in a certain line of business and you think, you know, that line, uh, something changes and you're very confident. You understand why it changed. And then it turns out that you're wrong and it doesn't actually turn around. And now you're way behind the, the, uh, the mark and you need to do a lot. Lots of premium, lots of underwriting changes, lots of claims handling changes. And you're trying to get caught up, uh, that I think that's something that happens in every company. Is there a pattern to those mistakes? You know, is there something that we can learn from like going into a line of business? What will be a way to do it poorly if going into new new line of business?
Speaker 4:27:17I think it would be assuming that you already know a lot of this stuff when we get into a line of business. I read a ridiculous amount of material. I've tracked people down, I track down authors and talked to the authors of this stuff. Uh, I think papers describing this and I think if you just listened to the people who are trying to sell you on the product, it's going to sound amazing no matter what you do. Uh, so you need to kind of do your own research and really figure that out. Where, where do you go? Let's say you wanted to, you wanted to get a new line of business where, where do you find this material? How do you, how do you, how do you do the research? So I'll start with the underwriter or the people who brought the idea to us and say, what did you guys read?
Speaker 4:27:54How did you guys develop this? And they'll provide me all of their authors. Uh, and then from there when I reached out to other people, it's more of like a chain. I kind of just go down the line and find the people who are like, Oh, you should look at this or you should read this until I kind of end up with my own opinion of it. How long does that take? So, so for the Fannie Mae and Freddie Mac stuff, I would say it took me about four months of research before I got fully comfortable with it. And even then, I don't think I was a fully expert on it, but I had it. I thought I had enough to have a good opinion on it. That's the line of business for which there's a lot of public information, mortgages and, but for the typical specialty, and I guess mortgage risk is only specialty in the insurance world, right?
Speaker 4:28:39I mean, that's like as mainstream, literally as mainstream as it gets. Um, in a, in all their aspects, in other parts of finance, but for us I think it'd be pretty hard to find a big literature on space launches, whatever I'm going to try. We're doing something that has to do with some intellectual property stuff that I'm looking to and trying to figure out. Uh, that's not, uh, just to give you an example on that. Uh, you recommended that book capitalism without capital. Sure. It was like listening to random podcasts will sometimes feed into feed into things and then reading that book they mentioned other books and now I'm digging into those books and reading those. I have all kinds of papers that I've gathered from them. So again, it's, it's, it's never one source and it's never a consistent source, but I'm always just trying to add to my knowledge because you also never know where things are going to crossover either. Like just randomly something from the mortgage world might end up helping me in the IP world. Who knows. Yeah. And I guess kind of bring it back to the, to the idea of the show today. This is the solution to a lot of these arbitrage problems is learn more, become an expert yourself. Exactly. It's a and not just becoming the expert, making sure you can convince people that you are the expert
Speaker 2:29:52[inaudible]. And so one of the kind of key ideas here is, is identifying the profit and, and I, I think of the cost as being called the, the, uh, maybe one of the reasons why the inefficiencies or efficiencies are there, right? So they're the perfect model of arbitrage is where you, where you can walk in and with zero cost, resolve the market, diverge the price in the market, the divergence in the market price against some fundamental value. But in reality you have all these costs. You have all these frictions, these frictions in the marketplace, you know, do, you have to borrow the capital and you have to pay brokers and you have to whatever you have to do. Right? And measuring those costs and measuring the potential gain that that's the, you know, that's the, the key analysis, analytical process and the stock market. That's easy. You come up with a price and you say, look at the market price today, or the average price for the last three months. There's a difference. Off you go. How do you make the value proposition and specialty insurance, like, how do you know, here's where I can make a lot of money. And how do you measure that? How do you measure the price? I suppose the price divergence.
Speaker 4:30:54So yeah, that's, that's the key part is where you're going to get your data right to figure this out. So if you have the right, what I've learned in specialty insurance, the probably the two most important things are your, your claims handling, uh, and your, your relationships. So in this case I'd say relationships is what you'd really need to leverage. You need to go out, you need to talk to the people and you need to get historic data to see what have they seen in the past, why were they having losses? And, and get an understanding of that. And if you can understand why they have losses now you can go to your claims handlers and be like, hey guys, can we do something about this? And it's really figuring that out. And then it's, it's paying attention to the, to the market who's entering, who's exiting a, if you can, if you see a line of business where there's a lot of people running away from it, that's the, that's the one you want to take a peek at.
Speaker 4:31:41You want to look at it and see what's going on here. Can we take advantage of this? Have you ever tried and failed to do that? Yes. Uh, also in the intellectual property world, I, he was, he took a shot at it and didn't quite tell me that. A lot of historic data, just a, something, something was different. We couldn't figure out what about the experience you had wasn't as good. So you went in and, and it didn't work out. Is that exactly the, we had a large, you know, a lot of data. We take a look at it and uh, it just, for whatever reason, it didn't perform exactly like we expected it to. And how quickly did you figure that out? It took a while. Like I said, we, we try to stick to our guns for a while, so it probably took three, four years before we finally said, all right, we gotta we gotta get rid of this
Speaker 2:32:33and of course stick to your guns because that's the, that's the mantra, right? That's the whole point of, of being an arbitrager or is that your discipline I suppose is, is what allows you to stick through the difficult times. Um, and what, what goes through your head when you have the first data point that comes in and it's not what you think it's going to be, you know, how do you, how, how does your, how does your call it, your baseline evaluation of the system? Walk me through the updating, you know?
Speaker 4:33:00Sure. So it's, it's, it's always concerning and it almost never comes in the first, the first years, usually not the greatest year part of it. Just because of your earning premium. It's, there's not a lot of premium, so you get one claim and it looks terrible. Uh, so it's, it's never overreacting. Uh, it's, it's always watching what's going on. And I'd say specialty insurance, again, the biggest thing is communication. It's talking to your claims. What are you guys seeing? A, what do you expect to see then? I'm always checking to make sure that based on what they're saying, I'm seeing it in the data. It's really just this cyclical meeting quarterly and figuring this stuff out. It's a, it's not so much as just doing your standard actuarial approach of saying we ran the numbers through and here's what, here's your answer. It's a much more involved, uh, of, of communicating with, uh, with underwriting and claims and in getting it really figured out.
Speaker 2:33:51Scary. Is this going into something new? I mean, how much do you feel like you're buddying reputation is on the line for things like this? I mean, how do you mitigate that or that fear? Maybe.
Speaker 4:34:00So it depends on the line. So some of these are coming in, they're really small lines. I'm not too concerned, right. The Fannie and Freddie stuff, huge exposure. I'm very concerned about it. So the very, if that goes wrong, things we're going to be very bad. Uh, there's a whole lot of loss on the line there, but uh, so, so it really just depends on the line and as far as like my reputation, it's, you know, it's, it's, you want to get more right than you get wrong. Uh, so it's, it's, it's always in play. It's getting the big ones, right is the most important thing.
Speaker 2:34:31Well, what will be some circumstances where you would look, just call it big picture. Let's say you're, you're, you're allocating capital to the insurance industry or you know, you're running an insurance company and you've got to figure out new line to get into what are some things you can look for, for signals that there might be something here before you go to the deep dive deep dive.
Speaker 4:34:50So for just a, are you speaking to like a general overview of the entire issue? What are you mean
Speaker 2:34:56of all the lines of business in the United States? What, uh, what, what data points do I put in that list to have my dashboard for looking out for opportunities?
Speaker 4:35:04So generally I would say competitors and seeing who's, who's withdrawing from lines. Interesting. And that's, that's where I would kind of take a look.
Speaker 2:35:11Yeah. And looking for smart ones going in that you think of and dumb ones going out. I guess
Speaker 4:35:16mostly just people who coming out if, uh, if someone, if he's already loving. Yeah, if people are running from it and a piece of seeding the market, how do you measure that though? It's got to read articles, news articles. It's, there's nowhere you can go where you can get a list of everybody who's in a line. So you're reading the articles of saying who's getting into stuff, who's flattening out their exposure on it? Uh, and, and leveraging those with brokers, with reinsurers and saying, you know, hey, who's, who's doing this? How many people are you guys seeing people entering this line? And a sort of leveraging that
Speaker 2:35:47jet. And what's interesting about the answer is that you're not. Your answer wasn't look at how the is performing. Actually No. True. Yeah, right. It's more about evaluating the perception of how that line is performing by people's movements. Movement of capital.
Speaker 4:36:02Right. It's getting back to the paper. I don't want to rely on the historic experience I want to take. I want to. I want to look at the expected experience, so find a line where there's opportunity and then look at the expected rather than
Speaker 2:36:15just looking at the historic and and that case. You're looking at your competitors, right? As a potential arbitrager and they're all doing that too. Is Everybody in insurance industry? I suppose that arbitrager because I think that you could very easily slip down the slope of, well, everybody in the investment community things or know what they're doing. They'll think they have expertise. They all think they're making money. They all think they're picking the right stocks. Are they all arbitragers? Is there anything that's not an arbitrager?
Speaker 4:36:43So yeah, this, this also gets back to the paperwork. A lot of the financial theories rely on the fact that everybody's an arbitrager, but the reality is there's only a couple of firms that really specialize in arbitrage and I feel like specialty insurance, it's not quite that way. Pretty much every large insurer has some sort of division that does specialty insurance. Sure. Uh, but it's, it's sort of that same idea of there's only a handful of people who can actually take advantage of these, these opportunities,
Speaker 2:37:06[inaudible] and that's because they have special expertise. Uh, but I think in, at least the, in the insurance markets, everybody wants to believe that they understand the price of the business they're getting into because of their expertise. What do you think will be the difference between a standard law and especially line then? So that's a good question.
Speaker 4:37:28So for standard lines, the way I defined standard lines is usually the, the amount of data that you have. Okay. And so this is also why I think a lot of the centralized don't really have market cycles anymore. Uh, so if you're looking at personal auto, homeowner's, you have so much data out there that it's hard to come up with a pretty screwed up. Yeah, it's hard to come up with a very wrong answer. You might be wrong and might lose a point or two here or there, but it's very hard to mess it up a lot. Uh, and the, the biggest, the biggest thing in standard lines is actually price. You need to shave expense dollars. You need to figure out how to get more efficient. It's less about getting the answer right. And there's a lot of people who do standard lines because a lot of people do it. You end up with not having market cycles, right? This gets back to the paper where they're discussing the glamor verse value stocks, right? So if you're an arbitrager you can try to take advantage of that, but it's such a long term play that you ended up running out of capital before you can close out of that position. But eventually investors, all investors catch onto it and then they make that play and then the, the market becomes efficient. Uh, and
Speaker 2:38:36market efficiency in the insurance world is not having an underwriting cycle, it's just you're charging what you should be charging. And I think that's the, the idea in standard lenses, you have a lot of people who now know what they're doing and now you don't really have a, as many market cycles, you still have some cat, a cat shock that, that causes some cycles. But for the most part, underwriting cycles have sort of died out in the standard lines. You know, I think of in a standard lines is actually in some ways being less competitive than specialty lines because they are, the barriers to entry are almost higher and this is kind of where I feel like I don't have a good metaphor in the financial markets for it. There's two ways in which I, I think that the comparisons, maybe they break down. So you think.
Speaker 2:39:15So one of them is in standard lines, tend to be dominated by a few quite large carriers, right? We have enormous expertise and for whom competing against them is madness. Right. So you're saying, Hey, I'm going to be a preferred auto carrier in California and I'm going to go up against progressive and Geico and state farm and travelers and really like us to be out of your bleeping mind. Right. How could you possibly beat them? We were like, well, I have all the data. Like, well there's a. there's a misunderstanding exactly about what you need to do to capitalize on that data and what data you can get for free and what the earth or you can pay for what data they have already. You know. So there's almost this clash at the behemoth which prevents everybody from getting in there. Because I mean, I worked for six years at Geico.
Speaker 2:39:53They're very good at what they do. I can't imagine many people are going to be able to step in and knock them off the perch and people always temporary. I'm like, oh, well, Google's really good at data. They can be very efficient. They could step in and do this, but I don't even know if it would be worth it. The margins on personal auto are so tight at this point that I don't know if it would make sense for a big player like that to try to disrupt it, but, but yeah, it's, it's, uh, the progressive, the Geicos are very good at what they do and it's going to be, it'd be tough to compete against them and maybe they're doing such, such similar things that, that they're emerges quite a natural equilibrium in that market of price level. You know, I think about history here where call it 100 years ago, the insurance, well maybe maybe 60 years ago or 70 years ago, it's better where the insurance cycles were a bit more muted as I understand it because prices were basically fixed and you couldn't diverge because you had a rating bureau that was saying here's the price and then you compete on God knows commissions usually in that case.
Speaker 2:40:50And so companies could go bust, but it wasn't because there was underwriting unprofitable, lack of underwriting profit as for some other reason. And in these cases. So it really is an oligopoly. Right. So you had, you had this cartel has a better way, better the right word for it actually, so you have this price fixing is going on and we're all in agreement, they're all in cahoots and they were having a great time and life is easy and you have a similar dynamic emerging with the mega personalized care is a standardized carriers where you have not as much competition because there are only so many of them and prices are pretty constant because we're all implementing the same kind of algorithms for the most part. Right. And nobody else is allowed him because the barrier to entry is you need the data, you need a system, you need the expertise to evaluate that data into competing against people like you, you know, a Geico like you're saying and you just can't really do that. And so it's probably not cozy because they're competing still, but it's not the same thing as these crazy cycles. You might get another environments where you have a lot more flow in and out of the marketplace like you would have. And I mean, I don't know. Like, I mean, I don't want to say commercial auto because I think that's another example of, might get to in a minute, but another very cyclical line of business, uh, where, where you, you do have to fight against madness a little bit more because people come in,
Speaker 4:42:03you can turn out. Absolutely. And I think dino is probably the best example. Okay. Dina, you know, you had the financial crisis. People left and it was a very hard market and now I don't, I don't know if there's someone who's not doing DNA at this point. The market isn't as crazy, so I was starting to harden up top is a good one. Right? There you go. That's when people come in and out of all the time. Right. But uh, but yeah, the, there's, there's just so many competitors in the dino. They all came in when the market hardens and uh, yeah, now it's madness. The site, the, the market is incredibly soft.
Speaker 2:42:31Yeah. Yeah. Uh, another, another thought I had the idea of commercial auto is in some lines of business. They're perennially unprofitable, often sort of the bug bears of at least the reinsurance industry are these capital allocators, right? So I think, I mean it was the part that the paper described capital providers as being kind of these lagging indicator, these sort of moving average last five years, profitability that resonated with me. If you have a track record, you get capital, if you don't, you don't, uh, and, and some lines of business people just think you just can't make money. And there's a, I would say, I'm not saying it's the majority, but a significant plurality of capital fighters out there just believe you just cannot make money in something like commercial automobile insurance. And the reason why is the way I would put it actually, which is just kind of corrupting a positive term in the financial markets is liquidity and in this case liquidity of distribution.
Speaker 2:43:23So it's easy to win business and nonstandard auto and commercial auto because the customers are out there trying to find the cheapest price somehow and they're looking for it. Whereas the illiquid lines of business are much more profitable. Now. That idea is consistent with the financial markets, but I think the reasoning is very different because when you have a highly liquid market, it's easy to get screwed because if your pricing is wrong, they're going to find out and they're going to fill you up with ms dot price business in that line of business. What do you think?
Speaker 4:43:49No. Yeah, that's, that's definitely true. It's the, uh, the adverse selection. Adverse selection, right? That's the key words. Uh, it's something you gotta watch out for and
Speaker 4:44:01at Geico and the personal auto side, it was something you only worried about in specific segments, but in the commercial auto side, I feel like it's, it's a lot more, there's a lot more flow of customers that are less loyal. Uh, like you said more looking for that, that, that low price and that can be, that can be a big problem.
Speaker 2:44:17And you, do you think that. Do you think that liquidity is, is there an equivalent idea and insurance,
Speaker 4:44:25because my abilities aren't liquid, right? You can't get out of a policy once you write it. Right. I, I think it's an interesting to try to draw a line between a policy retention and liquidity, considering like, Oh, if you're willing to move a, it's a liquid, very liquid. Uh, it's, it's, I don't know where to go with the comparison, but uh, it, it is interesting.
Speaker 2:44:44[inaudible]. And so what do you think is, is kind of a fundamental determinant for whether a line of business,
Speaker 2:44:52I'll put it differently. Is there a structural reason and some lines of business where by you think you can make more money than not? The paper makes this point I'm getting at and long way is some markets are more susceptible or more appealing to arbitragers than others. They like the actually, ironically as paper said, if I understand this right, they are actually a little bit wary of really, really highly volatile markets because it's just too easy for position to run away on you for, for no good reason. Right? So they kind of want to have obvious obvious Iras or profitability in easy to analyze lines of business. I mean not so unreasonable. We probably come across all the time and insurance. Uh, do you think there's a, is there a kind of a framework for thinking about what isn't appealing or unappealing market for, for arbitragers and insurance?
Speaker 4:45:37So, yes. Uh, in the specialty insurance, it's going to be the same thing as depending on the risk appetite of the investors. Uh, if you're, you're dealing in an excess and reinsurance, you're very low title results as long as the investors are okay with that. It's not a, not a big deal as long as they understand the results. Yeah. Uh, it, it really depends on the insurance world, what your investors are. Okay with, uh, if you, if they're not okay with those sort of volatile results, then you need to look at the more interesting things that are high frequency, low severity. I'm getting into like professional lines where you're looking at like Epl, uh, those types of lines are at higher frequency. Not a lot of people do it. Maybe you can take advantage of that. But, uh, the, the whole idea of, of, of avoiding volatile results, it really just depends on your investors because there's a lot of opportunity in those lines as well. Because if they don't want to get into it, then there's probably a lot of other investors who don't want to get into it.
Speaker 2:46:29How, how, how far back could you go into A. I have a number of my head, um, what's your number? How many years back can you go and reasonable to get to get Indian insight in the lineup business?
Speaker 4:46:43So it depends. Things that involve like the financial markets. I, uh, I don't want to go back too far. It's probably like a right now. It's really tough because the market's so crazy. But like three, four years, I'm like, I'm willing to go back. Things like employment practice, liability. I'll go back six, seven, eight years. I'm okay with that. Uh, things like, were you looking at excess? That's really tough. I don't know if there is a number. It's just a, you have to kind of judge on, on where you're at right now because it's going to have, when you're, when you're doing access, the layers that you're at, who you're ensuring the industries that you're in, uh, become very, very important. So just looking at your, your history, maybe you look at the history of the industry, but looking at just your, your history isn't to be super helpful
Speaker 2:47:30and what's underlying model there? So what's, what's telling you this market. Go back for this market, go back eight. What, what is the characteristic of those, of those markets that, that makes that
Speaker 4:47:43consistency? Uh, if, if I'm seeing, you know, frequency staying pretty consistent across time, not large jumps, then I'm okay going back using a lot more data. Of course the, the, the issue there is if it is consistent that you don't really need a lot more data, right? Where if it's very, very volatile, it gets tougher to, to rely on the history, which I know is sort of counterintuitive, but if it's volatile it means that you probably can't trust your history as much as, as you got to do a little bit more digging in and trying to figure out, you know, maybe you can break it into smaller segments. Looking at, like I said, specifically into the industries and looking at the history there, but it gets tough.
Speaker 2:48:23Yeah. Yeah. The, the, the, the term of jargon there is non stationary, right? So that means the underlying forces that are, that are just, that are moving, the prices around have changed and there are not observed directly, but somehow the pattern, the, the, the, the, I guess the pattern of price movement has changed. The characteristic behavior if you want to use these kind of anthropomorphic kind of ideas is changing and so you can't rely on the other data. I mean you, you, you nailed it. And I was just gone for that too. As you're, as just as you mentioned it was, isn't it ironic that, that you, you, the more volatile lines of business, you want to actually use less data which you would think is making the volatility worse, but actually the observation you're making, there might be something else going on under the hood that we don't see.
Speaker 4:49:06Exactly. That's when you get into data modeling, right? You want to build a some sort of model that can can predict what's going on a cause because if you're using your history, if you're using your very volatile data and you're using a long history and it's performed really well for six years and really poorly for two years, you're going to go, oh well everything's fine and that's not the reality right there. The reality is that's probably not good. Good history of use or you need to have going forward and to figure out what's happening and why are we seeing these results. It seems to me that
Speaker 2:49:34the returns always convert to some kind of market equilibrium, return, call it whatever, whatever the who knows what drugs, capital returns. I mean, I don't know, and this is one of the things that frustrates me a little bit about the analysis of the softening markets and various lines of business because you have a secular forces that being gotten observational bigger than all of us economic forces that are really pushing around what the real return. You're gonna I think if returns as not actually under your control, the market's going to tell you what your return is going to be in. It's not really up to you to, to, to tell the market, you can pull your capital out, but the market, the returns going to be the same. And so this is, you know, an idea of what was maybe right, maybe wrong that I have, but ultimately their returns you're going to get are. If they're dictated by the marketplace, then there is no such thing as long as the marketplace as efficient. I suppose what I'm asking here is, is there an inefficiency that can persist in the marketplace because the market will just take it, right? People move in trout the prices
Speaker 4:50:31mostly. Yeah, I mean that, that could certainly happen. I, there's where you're just always unprofitable, but I think at some point you would. I would think that people would start to pull out a sort of like you're talking about with commercial auto, right? Like there's maybe there's just an inefficiency there that that's going to persist for. I mean, it can't persist forever, right? Because that would be an inefficient market.
Speaker 2:50:51Yeah, it would, wouldn't it? It wouldn't unless, you know. I think sometimes there's an I, there's this quote by, I don't know if I've ever used it on the show before by a guy named Jim Barksdale who found one of the founders of netscape and his quote is there's only two ways to make money bundling and unbundling. And I think of insurance sometimes if there's A. It's common to criticize your competitors in this business because for all the same reasons that it's difficult to determine the quality of an arbitrager because it's difficult to measure quality, divulged, measure, expertise and saying, are you right? Or you're wrong, and so you can pool your competitor because you don't understand why they would do this for a certain price and you think, you know, that's a bad price and they want the business. And one of the things that, one of the often the observed facts or observed features of their business strategy is that they're bundling things you don't see.
Speaker 2:51:40And so in the bundle of a northern underpriced auto policy is also homeowners policy and an umbrella policy. And a few other things, and so they can afford to actually be really cheap on one line of business because they're making money on other lines of business and so sometimes you can, you can see saying, I know for example, or I've heard of, for example, a umbrella business being called high excess business being pretty profitable but hard to get and so what you do is you read a little bit of this lower layer which is really, really hyper competitive and you're not gonna make any money on that. A loss leader to gain access to this other book of business and you might look like an idiot if somebody is only competing with you on that one line of business, but elsewhere is where you're making your money and so I don't know how that fits into the arbitrage framework. Maybe it doesn't. Maybe maybe you're getting access to a marketplace that you wouldn't otherwise get, which is consistently profitable.
Speaker 4:52:26Yeah, I guess I don't. I don't know if this fits in the arbitrary, but that's definitely something that happens pretty often where you'll. It's getting the value in that relationship. You're, you're, you're participating on, on one spot to get, get access to the other, uh, you're leveraging that relationship. And again, that's one of the key things in specialty insurances.
Speaker 2:52:43Yeah, it's interesting and it does not fit anywhere in arbitrage. I mean, relationships. That's such a fundamental part of what we do. I sometimes call insurance a moral economy, which is all about relationships and doing favors for each other and all above board, or maybe not always above board, but I don't know that it makes sense to analyze relationships in the context of work.
Speaker 4:53:03Yeah, it definitely doesn't work, uh, because you're, you're the, the other party in arbitrage is the market, right? That's all you're interacting with. It doesn't matter who's on the other side of that purchase a. So it's definitely where the comparison diverges
Speaker 2:53:16and relationships are constrained, right? So let's say that you're a gatekeeper for a really, really profitable marketplace. The market wants to get in there to wipe out those profits, but you're not letting them in and in, in a, in a broader kind of many to many relationship market, there's an unlimited amount of capital which can get, get pointed at a particular problem, but where you have to go through this relationship such, such a gatekeeper can only have so many friends, right? I mean, I found that you, your calendar fills up. You can only go for so many drinks, can only allow so many people in through the gate. And so that preserves a profitability, a profitable market from, you know, from, from the forces that, that, you know, move around your common stock prices.
Speaker 4:53:56Right? And I think this gets into one of the reasons why, uh, when the market's hardening, you really need to go hard into that market as a specialty insurer. Uh, you don't want to be because the window's open, right? The windows open and you can get those relationships and, and get those intangibles. You're getting knowledge, you're getting data, you're getting the relationships. And all of those are extremely key. Uh, when the market does starting to soften that, you still have the relationships to get the business that's maybe going to perform a little bit better. You have the data to try to piece out which ones are the better ones. Uh, you have the, you know, the, the, the, the staff and the human capital to kind of understand a lot of that. And I think that's one of the key things for specialty insurance is that when that markets hard, you need to grow and you need to take advantage of it. The downside, the risk of that is if you're wrong, then you just grew whole, you know, very quickly and align. That's still gonna keep taking losses and maybe continue to hopefully continue to harden a. But there's definitely a risk to that.
Speaker 2:54:48[inaudible]. One of the ways I like to think of whenever I have a conversation about relationships as as they are presented in business, I'll eat a substitute relationships for corruption because in some just just for fun I suppose because in some countries in the world, not of the Maura's openers, law abiding is ours, but a relationship once they call it, this gatekeeper would be somebody saying, you pay me off and I'll let you in, and that's corruption, right? So relationship is a form of it's non market behavioral constraint, right? So it's saying you are or are not our trading constraint rather you are not allowed to get in there and but you can't pay in a row and so it's. It's a district librium in the market and there's going to be rent seeking to these economic term for getting in and out in. And I wonder what you think of the idea of specialty insurance or to call it the idea of the window being open. The underlying model there is actually one of a kind of corruption where people are are looking to get to extract some kind of value in order to. Let people into to access those profitable opportunities. When you think about that,
Speaker 4:55:50I'm sure that's, that's part of it, right? You're, yeah, you're, I mean, that's, that's sort of the idea of, of, of brokerage, right? You're trying to make sure you're getting paid to go to, to get that access. Um, it's definitely a bit more above board than, than just sliding somebody some money, but the idea is that you're getting paid for that relationship. You have the relationships that, that the insurer wants to get to.
Speaker 2:56:11So we're running out of time and I wondering if we could close on anything in particular that you think that you, any observations you haven't made yet about what you do or do not like about arbitrage as it as it as it is extended to include specialty companies is uh, what's your final assessment? Does it work? Is it, how, how, how strong is it an explanatory force?
Speaker 4:56:34So in relation to arbitrage relating to special team chats. Me. So yeah, I think the correlation is very strong. Uh, I think, uh, that knowledge gap is, is, is key, right? That, that, uh, that gap between what the arbitragers know and what the investors now I think that's one of the key relationships, the idea of the market cycle being driven by that performance based, uh, allocation of capital. I think that's, that's a high correlation right there, right? Because they're, they're using the, the historic experience of a line of business to decide where you're gonna go into capital. I think that's what's driving it as far as what, what can I actually pull from and what can be useful. It's kind of tough. It, it helps me at least put a framework around this and kind of think about some things. Um, it potentially opens up more papers that I can read of. I'm probably going to try to dig up some papers on a capital allocation for arbitragers and see if it correlates, if I can find some more relationships there. Uh, but it's, uh, it's an interesting relationship.
Speaker 2:57:30It isn't deep. My guest today is Mr. Rich, thanks for joining me. Thank you.