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I am concerned about Athene. The life insurance industry in its history has had direct lending and has sometimes been quite good at it. The problems come in one of two forms: a) when new investments come in that the risk-based capital rules haven't anticipated, and more risk gets taken than should be. b) When the ordinary process gets turned on its head, moving from writing policies and then investing the proceeds, to making investments and writing policies to fund them.

The second point may seem like a distinction without a difference, but it is a change in mindset where the companies using the second model always take more risk than those using the first model. They blow up more frequently. After a few blow up using new assets, that is when the first point comes into plain view, and you can finally start calculating what the correct risk weightings should be.

Now, going back past the beginning of my career (actuary, financial analyst, quant, businessman), there once was a rule that all new assets that didn't fit the risk categories (non-admitted assets), could only be invested in as a deduction from surplus. You can invest in them, but it lowers your surplus by the cost of the non-admitted asset. I think that still exists in some limited form, but with new asset categories the adventurous try to shoehorn new assets into a category that it doesn't really fit.

Thanks for a good post.

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Thanks David. Both for the kind words and the very thoughtful comments.

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