Frank: All right, well, you picked the right question given where I grew up. I grew up on Long Island in New York and went to high school in Manhattan and college in the Bronx, so it kind of covers the whole metropolitan area of New York. My first concert, I think, was actually Billy Joel, if I'm not mistaken. So if you're from Long Island, you have to be a Billy Joel fan. That's kind of a great way to go to your first concert. I started out in banking, worked at two different banks, and then made my way to PricewaterhouseCoopers. Surprisingly, I didn't think I was going to work in an accounting firm, but their structured finance group was recruiting for people to join from banking and do new issuance for collateralized loan obligations (CLOs), in particular, but also other structured products. This is going to be a great conversation as we get into it today. One of my clients was a health insurance company, and I made my way over there. I've been working at two different health insurance companies over the last 15 years. It's been a fun ride along the way.

Stewart: That's fantastic. Thank you for that. Jason, how about you? Where'd you grow up? What was your first concert? And if you don't like that one, you can also go with your first job, not the fancy one, but we'll stick with the first concert and talk to us a little bit about how you got to your senior position at MetLife Investment Management.

Jason: Yes, sure. Thanks, Stewart. Yes, so I grew up in Dallas, Texas and spent the better part of almost 40 years there, and went to college at TCU and did my Master's degree at SMU. My first concert was actually, probably in late elementary age, Dave Matthews. Oh, wow. I still remember going with my father, and I remember asking my dad, “What is that grass smell like? Something's burning.” So not only did I get to enjoy Dave Matthews, which was my favorite band, but I got a lesson on agriculture that day as well, I suppose.

Stewart: I like it.

Jason: The first job that I had right out of college was at Citigroup. I was going through their banking program, spent a few years there, and then, right around the time of the Global Financial Crisis, I had the pleasure of joining IG Group in its agriculture group. It was in 2007, and so I got to have a front row seat to see how all that unfolded and very quickly moved over to the corporate private team and spent the better part of almost 17 years doing private corporates. And then, most recently, I was doing asset-based finance. And so here I am today, two years on at MetLife, and really excited to be with you guys.

Stewart: Thank you so much, Jason. I appreciate the background. It's one of the things that we get consistent feedback on that people like, so it's good. But let's get into the meat and potatoes here today. Frank, let's start with you. For those who are less familiar with the health insurance industry, can you give us a high-level overview of the health operating model, which is different, right? I got to be honest with you — I have a lot to learn here too — and please explain how the unique cash needs of the health insurance industry influence your portfolio's positioning.

Frank: I think that's a great question to start out with because the health insurance model is probably different from what you think about in other lines of insurance coverage. The premiums generally are going to be paid at the beginning of the month, and then claims will flow throughout the month. So as dollars are coming in, they're not necessarily investible on day one because you have to pay claims. Generally what you'll have is — you'll have a buildup over time, and then the excess will be moved to the longer-term general account investment portfolio, which you generally won't touch unless you have a bad experience or something like a pandemic, for example. As you need funds, the business is really structured in —I would say there are a lot of ways you can divide it up — but by and large, today you have fully insured business and you have self-insured business.

And I differentiate that because it makes a difference in operating cash flows. On the fully insured business, it's just like I said, claims come in, premiums come in, claims are paid. On the self-insured side, you're actually administering the claims for large companies, and then they're funding those claims. So hopefully there's no drag, you're just kind of administrating it, but the funds are flowing through your bank account at the end of the day. And so, given the differences that happen depending on the type of company, it is going to depend on how much of that cash has to move in, and also how we think about liquidity, and how much you invest, and how you structure your general account in the event that you need to pull cash out of there.

Stewart: That's super helpful, thank you. Jason, and I think I'm kind of smiling as I ask this question: Private fixed income can mean a lot of different things to different investors. So, for the purposes of this podcast, how do you define it, and in which areas of the market are you most focused on today?

Jason: Yes, great question. I'm very involved with undergraduate recruiting, on-campus recruiting, and I talk about the story when I would go to on-campus recruiting many years ago. I would talk about the fact that I was doing investment-grade private placements, and this was 10, 15 years ago, and the students coming right out of school — that just didn't resonate with them, they didn't know. So you work for an insurance company, what does that mean? Oh, you're investing in bonds. And it's interesting as the times have evolved, as you've had a growth of obviously private capital, new originators, new investors coming into the space, you've obviously seen a lot of change with the pullback from bank lenders, regulations and whatnot. Our market, our sleepy little corner of private credit, our investment-grade private credit is really front and center now, and it's a very dynamic market.

There are things that come and evolve very frequently in different sectors and different spaces, but we're predominantly playing within MIM on the investment-grade private capital side. I like to compare it to the hybrid of a public bond and a bank loan. And what I mean by that is that we can execute on very large-sized deals; we can find very large issuers that are of high credit quality. It is predominantly fixed-rate debt that you see in the public market, and we are able to do pretty long-duration transactions. But then on the bank loan side, where we are very similar, we actually get to know the issuers very well, and there is a very robust due diligence process. We build relationships with these companies that often expand to 10, 15 and 20 years.

We are getting prepayment protections for our client portfolios, and often we're able to demonstrate, because of these structures, better recovery rates than the public markets. And so, if you look at where MIM is positioned, and how we're accessing the private capital world, it is predominantly, as you would expect, half of it is in the corporate space, another 35 to 40% of it is within our infrastructure group. Then we've got a growing asset-based finance team that's seeing a lot of tremendous momentum and growth with our client portfolios. All told, about $110 billion U.S. portfolio, and originations in this space, depending on who you talk to, you’ll get different answers, but it's anywhere from a $100 to $150 billion of annual origination. So it's a very active market.

Stewart: Yeah, I think that is a really helpful answer. I appreciate you giving us that level of detail because it helps me as well to frame the conversation. Frank, I want to come back to you. What are some of the key considerations for health insurers when they're adding investment-grade private fixed income into their strategic asset allocation, particularly around illiquidity risk? You mentioned in the first question about cash needs for health insurers. How do you think about that?

Frank: One of the things that I like to think about is the fact that insurance company investing is actually very interesting. A lot of people think it's this news fest, but I know I'm in good company with you, Stewart, and the listeners on the podcast here.

Stewart: Absolutely. We are dedicated geeks that think this is super cool. Absolutely true. I'm the flag bearer for that parade for sure.

Frank: Well, I'm happy to be part of that and I think you should make that the tagline going forward. I love it.

Stewart: That's right.

Frank: But as you think about it though, the reason I find it so interesting is because when you put constraints on, that's really what differentiates how you think about your portfolio. When you have an unconstrained portfolio, you can put your assumptions in, do a mean variance optimization, let it kind of flow out to your strategic asset allocation. But from an insurance portfolio perspective, you have to think about cash needs, capital charges, investment income requirements, long-term total return requirements, return on assets, et cetera. You name it, all of the metrics that we have to think about as part of supporting the business. And so that construct actually makes you think differently than you normally would in an unconstrained environment. Based on the National Association of Insurance Commissioners framework that we all operate under, having investment grade is really the cornerstone of the portfolio by and large.

And so if you have a large part of your portfolio that's being allocated to investment grade, it's really important that you're maximizing that bucket for the best sharp ratio possible, right? We're going to have a lower-risk asset class, but how can I make sure that I'm getting the best returns possible in a diversified way? And so often, when I run our tools and look at where our risk is — it's very easy when you have a large investment-grade portfolio to have a lot of concentration — either interest-rate risk or corporate-credit risk. A lot of times, there are some industries that quite honestly dominate the issuance, particularly in the investment-grade space. And so you're not really diversifying your risk. When you think about adding investment-grade privates into the mix, you're actually thinking these are different issuers than would normally be in the public markets.

Thinking about how that plays into your broader diversification is positive. And then the other thing that you think about is relative value. Obviously, I'm giving up some on the public side. Looking at public versus private, what's the differential there? And I think at certain times there's a very attractive relative value. So if you make the allocation, it's very much a long-term thing. And then, finally getting into illiquidity risk, I think it's important generally that you don't want to sell these securities. My view is that once I invest, I want to hold them in the portfolio. And so it takes a lot of time doing scenario planning and stress testing your company and looking at — this is where I believe my two to three standard deviations, whatever cash flow needs may be. If I have that event, and I have to take money from the portfolio, where's that coming from, and then, what does that do to my target asset allocations and ensure that I'm not a forced seller in any one particular market? So it's almost like you have to think a couple of steps ahead, run some stress scenarios, but generally, if you can manage through that, the risk-return profile is very attractive.

Stewart: Just for the audience. You mentioned sharp ratio, and that is a measure of risk-adjusted return, right? You're dividing your excess return by a volatility measure. And generally speaking, I would always say higher is better. So it's a way for you to quantify relative value. Jason, back to you. Historically, private fixed income was dominated by long-dated corporates or infrastructure deals, but this market has evolved. What are the benefits and risks that investors should be aware of? You mentioned the momentum in ABF; we are seeing that all over the place as well. If you can bake that into your answer as well.

Jason: Yes, sure. And look, I think when you look at our client for whom we manage money, we're no strangers to helping out life insurance companies. Obviously, we've been working with the likes of Frank and Horizon as well, and the health insurance side, people that have asset needs for the different things that we talk about, corporates or infrastructure, and now including ABF. I mean, if you think about, again, back to where I was talking at the introduction, this has typically been a long-dated asset class. Insurers usually buy these assets, and it's a buy and hold, or I like to say, buy and manage. There's a big take-up in this because of the diversification that you're getting compared to the public sector indexes. And obviously, I talked about the covenants and structure, but with the entrance of new players into this space that are buying these assets, whether it be health insurance or reinsurance or even some of the pension plans on the defined benefit or defined contributions, you're seeing different pockets of capital arise, and we're able to deploy across a lot of different areas now because of that.

And one of the things that's going on in the marketplace is, and you're right, Stewart, this has been a long-duration asset class, but with a couple of things going on with shorter-duration liabilities. And in addition, we've got base rates that have come up from its historic lows, call it 2022, 2023. A lot of the issuers that we're working with are deciding to maybe not print longer deals, and maybe they decide to do something shorter, and maybe they have a view that rates will come back down at some point. I'm not just sitting here and saying that's right or wrong, but what that's allowed us to do is we're able to deploy shorter-duration assets. And if you think about when you go back to 2022 or 2021, about 11% of the market was five-year and inside duration assets. And today, sitting at the first half of 2025, I see that about 30% of that is now shorter duration.

It just speaks to us being able to be a dynamic market. We're able to find new ways to innovate. And the other thing, too, that I'd say is there is still a very big demand and need for the longer-duration assets. And so, what we're seeing with what is coming to the market, the relative value for the longer-duration assets might be a little less than the shorter-duration assets. Where you are having pockets of demand or pockets of capital of shorter-weighted average life, you may actually get better yield premiums. And then the last bit I would say is just that there are often times when we're in front of clients, they worry or are concerned about liquidity in this asset class. And I make no bones about it, we're not going to ever be as deep as the public market. But there is convergence there. And I think when you look at the annual volumes of secondary trades, they’re anywhere from three to five billion a year. It does take a little bit of a longer time to settle just because we still have an archaic physical settlement process. But when we are exiting positions for our clients, we are able to achieve pretty good liquidity, and we're able to achieve it at prices that reflect pretty closely to fair value. So it's just an area that, as more people come into this space, becomes less of a concern.

Stewart: That's super helpful. I'm going to come back over to Frank and follow up on to that question. As Jason was pointing out, private markets have evolved, and it seems like the health insurers and other insurers, not just health insurers, but other insurers, are thinking about expanding beyond traditional corporates and infrastructure into areas like asset-based finance. And Jason talked about the diversification benefits. How do you think about that as an investor? I mean, I always say that these insurance companies are like snowflakes from a distance. They all look the same. All the Blues plans look the same from a distance, but when you talk to people, there are individual nuances at Blue Cross Blue Shield of New Jersey that other Blues don't have. I don't know what they are, but I'd be willing to bet you that there's stuff that you deal with that may have a different importance for you than others. How do you think about the health insurers moving into this space?

Frank: Yes, it's a great question. And you're right. Every health insurer is different. And among the Blues plans, we all have different business mixes and other things that just differentiate us — could be geography or whatever else it may be. And so as you enter into it, and you look at this asset class, you think about again, the overall objective of maximizing return-per-unit of risk that we talked about earlier. You think about the diversification benefits that Jason spoke about. I think that's really important. I said earlier, you look at a traditional insurance portfolio, you wind up with a bunch of interest-rate risk and corporate-credit spread risk. And so moving out of that, you say, okay, well, I think a lot of us in our portfolios have some form of asset-backed securities, and so we get comfortable with whether it's a student loan, ABS credit card, ABS or all these other asset classes.

But even still, you have a lot of consumer exposure in there. When you look at the private asset-based finance world, you start opening up a little bit because these are not like traditional credit card issuers and all the other ABS vehicles. You have a lot of specialized finance. And a lot of that comes at a relative value premium as Jason was talking about earlier, and a lot of flexibility from a lender perspective about how you can customize things. Perhaps that extracts more relative value out for us as an investor. And so I think when you have a fantastic partner like MetLife Investment Management, they're kind of working through things a little bit, you can deliver a lot more value. And for us, when we pull it together in the portfolio — and we talked about the great definition of the sharp ratio — you actually wind up with a much better sharp ratio. And additionally, your capital charges are not going up at the end of the day because generally speaking, these are going to be rated structures, so they're going to have similar capital charges. And then, you're also going to have improved investment income, which is really important for health insurers. So the diversification is important, relative value is important, but also managing that risk-adjusted return is equally important as well.

Stewart: That's very helpful, and I really appreciate that. Just going into the nuances there, Jason, we're going to come back to you looking at today's environment. Where do you see the most compelling opportunities in investment-grade privates? Whenever I ask that, I also ask if there's anything that you're cautious about. I always want to ask kind of both sides of that question. And how might these align with the needs of health insurers?

Jason: So Stewart, I think I could just tell you that Frank answered my question with that prior answer. I think when you look at where we're seeing compelling opportunities in investment-grade privates, it's really an ABF look. I mean, corporate and infrastructure will remain core. It's the largest piece of our private capital business. But as far as opportunities for growth and what we're seeing in terms of being able to help our client portfolios, it's really in the ABF space. Frank talked about the consumer side. Obviously, that's a very active sector within the public market, but where we're very active in the ABF world, at least at MIM, the consumer side is probably less than 25% of what we're doing in the ABF space. We're very active in commercial hard assets, fund finance and residential credit, and these are all issuers that don't have or don't tap the public market.

And on top of that, because these are all externally rated, and we are picking up pretty nice relative value to an index, it's a compelling argument to add to the portfolio from a risk-adjusted capital perspective and also from a health insurance balance sheet perspective. These are typically in the ABF world. These are shorter-duration assets. I would say it's anywhere from two to 10 years. Our average on the book is about five to six years, and we are able to customize it. If there's a need for amortizing structures or bulleted structures, this sector of the investment-grade world is able to offer that as well. Then you asked about where I am cautious? Look, a lot of the conversation we've had today is about the new entries into the space, and there's going to be a lot of capital chasing a lot of these deals. And so I think for us, as we're looking at managing our client portfolios, is to ensure that we're being diligent in the underwriting process, that we're really understanding the structures that we're signing up and putting into our client portfolios. There is a risk that, as capital chases fewer deals, there's degradation. And so for us, that's very important that we are implementing a capital preservation strategy for our client portfolios.

Stewart: That's great. What a great education on this topic: investment-grade privates, ABF and the strategic asset allocation process in health insurance. I really appreciate that. I've got a couple of fun ones for you on the way to the door. I do want to point out, Frank, that you are currently serving as an adjunct professor at Hofstra. I was a professor for seven years. I started out as an adjunct, and I can tell you that I know that you must have a deep commitment to paying it forward because it darn sure isn't the money. So I just want to kind of give you a shout-out for that, because I do think that it's super important that accomplished professionals like yourself get into the classroom and let students benefit from your deep expertise. So kudos there.

Frank: I appreciate that. Stewart, I didn't realize that you were a fellow adjunct, so it's not for the money. You nailed it.

Stewart: I was an adjunct for one year, and then I was a full-time professor for six, and it was a phenomenal experience. I was happy to get into the academic world, and I was happy to come back into the industry as well. And I learned a lot about not only about how to teach, but also I learned a lot about myself. But here's the question, I guess for both of you, and I'll start with you, Frank. When you're adding to members of your team at Blue Cross Blue Shield of New Jersey, what characteristics have you found about folks have that are ultimately successful, not about the school that they went to or their Excel or Python skills, but are there characteristics that you think make folks more successful than others?

Frank: Yes, I think it's a great, great question. And one of the things I look for is — I don't look for people that are exactly what I need. I'm looking for somebody who can grow with us. And to me, the two things that I look for are somebody who's naturally inquisitive, and who's a self-learner, because the world is rapidly evolving. I mean, just given what's going on with AI right now, right? The world is going to look completely different 10 years from now. And so you need to be a lifelong learner. You need to be inquisitive. You need to figure things out on your own. And so, if you find people that have that natural instinct, they want to grow, and they want to learn more, they want to figure things out — my experience has been you can throw anything at them, they'll do well, and they'll continue to kind of help and improve the team in the long term. So great, great question.

Stewart: How about you, Jason? When you're adding members to your team at MIM, are there characteristics that you find make folks more successful than average?

Jason: Yes, look, I actually will credit an individual I worked with many years ago at AIG, but you would talk about aptitude and attitude when you're looking to hire somebody. And obviously, I think when you're getting in résumés and you have the ability to kind of sort through them, well, we live in an environment and a society where people are very well educated. That's great. That's fantastic. So the aptitude often is there. I think really what it boils down to is the attitude. And what I mean by that is, are they showing up to work, ready to learn? Are they engaging in thoughtful, provoking questions? Are they a team player who's willing to roll up their sleeves and help where they’re needed? And then the other bit to it, and it's no different than even the workplace. I even talked to my children about this, but it's about grit. And I think there are challenges in work and life, and I think for us to be successful, you often have to express grit and be able to work through your issues and work through your problems. And when people do that, they're often rewarded on the other side with success. And those are the two areas that I really think about.

Stewart: That's really helpful. I think being a consistent listener to the insuranceAUM.com podcast is also something to be considered here. Just a shameless plug. So, okay, last one for both of you, dinner for four, you each get to invite one guest. It could be anyone alive or dead who is coming to dinner. Frank, we started with you. I'm going to start with Jason, who's coming to dinner with you and Frank.

Jason: Oh my.

Stewart: You've got to listen to the whole podcast all the way to the end to get to this question.

Jason: Yes, this is great. Actually, it's maybe timely. I just finished recently. It was actually on the flight over here, but there was a series on Netflix about Nolan Ryan.

Stewart: Oh, wow.

Jason: And I remember growing up watching the Rangers, and obviously, he had a storied history, but I think he's a very fascinating individual. I love baseball.

Stewart: Absolutely.

Jason: So I think for me, it would be Nolan Ryan, just to hear about him and just to get to know him personally.

Stewart: I mean, he's been retired a long time, and I saw him throw out the first pitch not that long ago, and it had some heat on it.

Jason: Yes, he can still toss it.

Stewart: Yes, he can still throw it. How about you, Frank? Who's joining? Jason Young and Nolan Ryan at dinner with you?

Frank: Well, I feel like I have to invite my wife, or I'm going to be in big trouble, but assuming that she gets to kind of run along with me, I love ice hockey. I'm a big Islander fan and had an opportunity to meet Brian Trottier a couple of times, but I would love to just sit down with him for dinner. Brian Trottier, he's a phenomenal person. To be able to sit down with him and hear old-world stories about the Islanders when they actually won games, that would be great. So I would enjoy that a lot.

Stewart: That's awesome. I really appreciate you both being on and taking the time. Great educational podcast. So thank you both very much.

Frank: Thank you. Pleasure to be here. Thanks, Stewart.

Stewart: My pleasure. We've been joined by Frank Melaccio, CFA, CPA, FRM, Vice President, Finance and Treasurer, Horizon Blue Cross Blue Shield of New Jersey. And Jason Young, Head of U.S. Corporate Private Placements and Private Structured Credit at MetLife Investment Management, private capital. Thanks for listening. If you have ideas for podcasts, please shoot me a note at Stewart@insuranceaum.com. Please rate us, like us and review us on Apple Podcast, Spotify or on our brand new YouTube channel at InsuranceAUMCommunity. If you follow us on YouTube, Apple or Spotify, you'll never miss an episode. And so we sure appreciate that. We are the home of the world's smartest money at InsuranceAUM.com.