# The Northwestern Mutual Model Tynzz

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[00:00:00.140] Hi, friends. Welcome back to another episode of Peer Connections, the podcast series brought to
[00:00:08.590] you by the Global Peer Financing Association, also known as GPFA. These podcasts offer our
[00:00:13.390] GPFA members and global beneficial owner friends a forum for information sharing and discussion
[00:00:18.190] on topics most important to them. And we hope you, our listeners, appreciate the insights,
[00:00:22.570] best practices, and transparency offered from our members and industry friends about securities,
[00:00:27.130] finance, or related investment areas. Now let's get into the episode.
[00:00:35.960] Thanks for joining us for another podcast episode of Peer Connections from the GPFA.
[00:00:40.140] My name is Chris Benesch. I'm a Portfolio Manager here at the State of Wisconsin Investment Board.
[00:00:44.100] Today, we're going to hear from one of the newest members of the GPFA. They're coming to us
[00:00:48.140] actually from just down the road here in Wisconsin. I'd like to welcome Brian Yazel
[00:00:52.080] and Chris Breitzman from Northwestern Mutual. Welcome, gentlemen.
[00:00:55.800] Good morning, Chris. Thanks.
[00:00:56.780] Good morning. Thanks for having us.
[00:00:58.800] Guys, maybe to get started, why don't you tell us a little bit about
[00:01:02.200] Northwestern Mutual and a little bit about your roles there?
[00:01:05.280] Sure, I can fill in some gaps there. So Northwestern Mutual is now the largest
[00:01:10.800] provider of whole life insurance in the United States. We have about 250 to 270 billion of
[00:01:18.820] assets that we manage for our life clients, but we also provide other products such as long-term
[00:01:25.060] care insurance, disability insurance, and we have a very large and growing wealth management
[00:01:30.400] company as well. We're managing actually client money directly. Company's been in business for
[00:01:36.580] over 160 years. It dates back to the 1850s. We are one of only a couple of AAA rated companies
[00:01:44.100] in the United States. So very strong financial standing as recognized by all the major rating
[00:01:49.480] agencies. And as you've mentioned, we are homegrown in Wisconsin. We've been located in Milwaukee
[00:01:54.180] since the company was founded and we have every intention of staying here. And also to mention,
[00:01:59.760] we're not a public company. We are a mutual company, which means we are owned by the policy
[00:02:04.360] owners and we don't have many of the pressures that public companies have in terms of quarterly
[00:02:09.360] reporting requirements, responding to shareholders, those types of things. So we were very comfortable
[00:02:14.500] being a mutual company and think that's the best way to run our business. Thanks, Brian. Tell us a
[00:02:19.800] little bit about what you do at Northwestern. Sure. So I've been with Northwestern Mutual since 1994.
[00:02:25.110] I was brought in to manage the cash for the company. And over the years, my role has expanded.
[00:02:32.890] I started an in-house securities lending program back in 1996. I still oversee that program as
[00:02:38.730] well as the cash, but I'm also now involved with macroeconomic analysis for our fixed income team
[00:02:45.750] and also running duration strategy for our public fixed income investments.
[00:02:51.720] That's excellent. And Chris, welcome. Why don't you tell us a little bit about your role as well?
[00:02:56.480] All right, thanks. So I've been working with Brian for a few years now. I have been with
[00:03:00.340] Northwestern Mutual for roughly 15 years, but I came up more through the investment side,
[00:03:05.240] active equity management, kind of did a little bit of strategist type work there.
[00:03:09.560] And now I've been focusing mostly on the macroeconomic part of the effort here,
[00:03:15.340] as well as a little bit in emerging markets, but that's ancient history at this point.
[00:03:18.880] And going forward, kind of carrying Brian's bags in terms of what he's built here in terms of the security lending and repo operation, maybe bring a little bit of a different investment perspective to it.
[00:03:27.940] But otherwise, just trying to continue with the successes that we've had.
[00:03:31.420] Excellent. And as both of you are aware, GPFA was founded by folks that are deeply involved in securities finance at our various organizations.
[00:03:38.720] Maybe you guys can share a bit about your securities finance activities, how they're
[00:03:43.100] structured, what you guys are engaged in, whether it be collateral management, liquidity
[00:03:46.580] management, maybe some unique aspects of how Northwestern Mutual views these activities.
[00:03:51.740] Sure.
[00:03:52.440] You know, as I mentioned earlier, I've run the securities lending book since we started
[00:03:56.720] bringing it in-house back almost 25 years ago now, 26 years ago.
[00:04:00.880] And over the time, that role has really changed.
[00:04:03.720] Initially, it started out lending just about anything in fixed income, whether it was
[00:04:07.760] treasuries to corporate bonds to high-yield bonds. We manage that internally, and we've always
[00:04:14.400] managed the cash internally. We feel that that's an area where we have a bit of a competitive
[00:04:19.160] advantage since we have such a large cash portfolio to begin with, and this was just kind
[00:04:23.760] of an add-on to that activity. When it came to lending out some of our equities years ago,
[00:04:30.620] we found it beneficial to use a third-party custody agent for that. A larger amount of
[00:04:36.620] transactions that go there, the operational efficiency. We just didn't have the team in
[00:04:41.020] place to do that internally, so we thought it would be better to have an agent do that for us.
[00:04:46.740] I felt that was the best use of our resources from that standpoint. Back in 2008, the financial
[00:04:52.840] crisis changed the way the banks and brokers could interact with firms like ours. Their repo books
[00:04:58.780] began to shrink. They had less demand for assets from lenders such as us. And over time, we have
[00:05:06.600] shifted or transitioned our lending book to now where we are not really lending directly to banks
[00:05:12.780] and brokers through a lending program, but we're actually doing more direct repo with other asset
[00:05:17.940] managers, so-called end users of these assets. And we find that that's where the demand now for
[00:05:24.420] treasury and high quality collateral really is coming from. So that shift has been relatively
[00:05:31.440] recent, since about 2018 or 2019. But now that makes up almost 100% of our book of business on
[00:05:40.000] the lending side. And what asset classes are you lending through the repo structure?
[00:05:44.300] Right now, we're lending treasuries and mortgage-backed securities, interestingly enough.
[00:05:48.940] For a counterparty like a money market fund, a government money market fund,
[00:05:52.740] they need AAA-rated, high-quality liquid assets, and mortgages do fit that definition. Of course,
[00:05:59.680] there's more transactional issues with lending mortgage securities. And what we did to get
[00:06:04.620] around that was we now lend under a tri-party agreement where we deposit our securities with
[00:06:10.890] the custody bank. And that way the custody bank handles all of the operational side of what
[00:06:16.030] happens with mortgage paydowns and coupon payments each month. All the things that would be very
[00:06:20.170] tricky if we were doing bilateral becomes much smoother and easier using a tri-party platform.
[00:06:26.670] That's interesting.
[00:06:27.370] And as you built out that roster of counterparties, how did you approach them and help them get
[00:06:32.730] comfortable with Northwestern Mutual as a credit counterparty?
[00:06:35.770] Well, there's two parts to that answer.
[00:06:37.690] The first part is from our risk management team, we can only lend to rated counterparties
[00:06:42.870] at this time.
[00:06:43.590] And that meant finding other asset managers that actually have ratings.
[00:06:48.010] So as you know, Chris, many pension funds don't have ratings.
[00:06:51.190] It's much more difficult for us to consider pension funds as a counterparty.
[00:06:54.850] But the government money market funds are all rated by the rating agencies, and most of them
[00:06:59.710] have AAA ratings. So from our risk standpoint, going to a AAA rated counterparty was a very
[00:07:06.110] good trade for us, you know, reduces the risk. Similarly, from the perspective of the asset
[00:07:12.070] manager, Northwestern Mutual being a AAA rated counterparty, there are maybe one other AAA rated
[00:07:17.750] counterparty that they could borrow from. So we become a very high quality counterparty for them.
[00:07:23.250] So there's a really natural fit for our firm with these asset managers to do business with one another.
[00:07:30.290] You know, that historical perspective, I think, is really important as we think about kind of how not only your organizations evolve, but the industry itself.
[00:07:37.890] As you kind of look to the future, what's on the roadmap?
[00:07:40.530] What do you see changing either within your organization or in the market?
[00:07:44.330] Sure. So, you know, we were just at the Beneficial Owners Conference a week ago.
[00:07:48.670] I got some really interesting perspective on some of the changes that are occurring right now
[00:07:53.170] in the industry. And I think from my perspective, the biggest change that I'm seeing right now is
[00:07:58.670] with the Federal Reserve having raised interest rates. So now we're out of that zero interest
[00:08:03.550] rate environment. I think the opportunity for beneficial owners or for lenders is that you
[00:08:10.890] don't have to go just for non-cash collateral. There's more opportunities receiving cash
[00:08:16.650] collateral and reinvesting that again with some interest rate opportunity, there is an opportunity
[00:08:22.350] to pick up yield on the reinvest side of the book that I think is going to make lenders look more
[00:08:27.370] closely at how their programs are structured and whether maybe they should be going for a mix of
[00:08:32.490] both cash and non-cash collateral and what the appropriate mix might be. The other issue that
[00:08:38.350] we have going forward is there's a lot of regulatory change on the horizon that we talked
[00:08:42.710] about at the conference. It will be very interesting to see over the next few months
[00:08:47.470] how the regulation will change, what will actually be implemented, and where the industry can provide
[00:08:53.370] feedback to the SEC in terms of, you know, for some of the proposals may not make sense,
[00:09:00.450] so they may actually reduce liquidity in the markets. And of course, we want to have a means
[00:09:05.470] to provide that feedback to the regulators as well. You know, Brian, you also mentioned how
[00:09:10.710] it's a better earning environment with the rates being a little bit higher. I think that that's
[00:09:14.830] giving us the opportunity to look at maybe some new asset classes as well. You mentioned that we
[00:09:18.290] used to do equity security lending. We don't really do equities enough to do that anymore,
[00:09:23.530] but we do still have a rather large emerging markets portfolio. We could start looking at
[00:09:27.150] expanding our efforts into that direction. And it makes a little bit more sense to start looking at
[00:09:31.490] new avenues for securities financing, whereas when rates were zero, it just wasn't really worth
[00:09:36.310] the effort. Makes sense. Certainly a number of opportunities there. You know, one thing you
[00:09:40.460] mentioned, Brian, regarding regulatory changes. I'm curious, as a mutual company, which you
[00:09:45.700] mentioned earlier, are there any unique regulatory issues that either create barriers or opportunities
[00:09:51.200] based on how you guys are structured? Well, that's an interesting question because an insurance
[00:09:55.420] company, we don't fall under some of the same regulatory requirements that a money market fund
[00:10:01.620] or an asset manager might fall under or a pension fund might fall over. We all have specific
[00:10:06.300] regulators that we have to respond to. And we found that from our standpoint, some of the proposed
[00:10:11.500] changes probably will not have or will have very limited impact on what we can do. And that might
[00:10:17.400] actually provide opportunities for us to, as Chris mentioned, increase into other asset classes or at
[00:10:22.220] least increase the amount of lending that we're doing with our current counterparties, just because
[00:10:26.640] they may have other counterparties that are being more restricted going forward. So it may actually
[00:10:32.460] provide more opportunities for us. Thanks. That's great. So maybe talk a little bit now about how
[00:10:39.240] you got connected to the GPFA and maybe what you're both hoping to either learn or contribute
[00:10:44.460] with the organization. Well, I'll start with that because I've known Rob Gooby for a number of years
[00:10:49.950] from going to the Beneficial Orders Conference for many years now. We've been on panels together
[00:10:55.010] and he started talking about this, must've been before 2014, 2015, when he started talking about
[00:11:01.410] how we could create some sort of an organization where lenders could interact either to make
[00:11:06.750] direct connections as counterparties or to provide, educate, and help teach one another
[00:11:11.410] about what we're doing, how we do it, what would best practices look like in certain
[00:11:15.510] features.
[00:11:16.410] I'm very excited for him that he got the GPFA off the ground.
[00:11:19.830] And I know he's worked very closely with Brooke on this for a number of years.
[00:11:23.630] I think it's really started to get some traction here.
[00:11:26.190] We kind of looked at it from the outside for a couple of years, thinking that, well, in
[00:11:31.330] the financial environment, the zero interest rate environment, and budgets are tight everywhere,
[00:11:36.070] how can we make this work, but found out that we think it's going to be very cost effective for us
[00:11:42.230] to be a member. I've sat in a couple of the conference calls that the GPFA has held hitting
[00:11:46.990] on specific topics. And I think the education aspect of it, there's really tremendous to be
[00:11:51.910] able to share the knowledge from people who are either very involved in lending and repo and
[00:11:57.930] multiple asset classes or those that just want to learn more about it. I think it's worthwhile for
[00:12:02.810] both. And that's where I want Chris to be involved there as well. I think that'll really help him
[00:12:07.010] being relatively new to this type of program to learn more about it.
[00:12:11.140] I was going to add that myself, having come up from the other side of the business and not having
[00:12:15.060] extensive experience in this area, I'm finding it very valuable for the opportunity to share
[00:12:20.440] best practices and network with these people that have been doing it for literally decades in some
[00:12:24.660] cases, and really an opportunity to pick their brain in a productive environment where everybody's
[00:12:28.840] really pretty collaborative. I've enjoyed that part of it that I've been in environments in
[00:12:33.000] the past where it's very much cutthroat and you're always playing your cards close to your vest. You
[00:12:36.340] don't want to share your investment thoughts or whatever. Here, everybody's been very open with
[00:12:40.580] what they've learned over time, how they've evolved, and everybody's followed their own model.
[00:12:44.620] And it's been an opportunity to learn fairly rapidly in my case, and I'm looking forward
[00:12:48.380] to doing that more in the future. Well, that's great. And certainly hope that you guys find
[00:12:52.480] that connection and that collaboration that is really one of the founding principles of the GPFA.
[00:12:57.480] Well, guys, this has been great. I just want to see if there's any final thoughts you have
[00:13:01.510] as we wrap up for today. Yeah, Chris, thanks. As I mentioned, I started our in-house program
[00:13:06.740] many years ago, and it is surprising to me how few people understand how the securities lending
[00:13:14.820] market and the securities financing market works. It's not rocket science, but if you go to your
[00:13:21.460] board or even to your manager, most people will not understand how it works. And therefore that
[00:13:26.320] uncertainty that creates a lot of fear about what are the downside risks. So I think it's important
[00:13:31.860] in our role as subject matter experts within our organizations to really be able to talk to
[00:13:38.320] what are the risks associated with this? You know, you're never going to add a hundred basis points
[00:13:43.520] to your portfolio, but boy, if you can add a couple of basis points in a very low risk fashion,
[00:13:48.480] that becomes attractive or even offset some of your costs of your custody business. That becomes
[00:13:54.460] very attractive for most organizations, I think. So learn as much as you can about where are the
[00:14:00.780] risks associated with this and talk to other people that are subject matter experts, be involved with
[00:14:07.040] the GPFA and go to these conferences because you will learn a lot about how the business model
[00:14:12.320] works, what could work best for you and how to explain it to your management team. I couldn't
[00:14:17.540] agree more. Brian Yazel, Chris Breitzman, thank you so much for joining us today, sharing a little
[00:14:22.280] bit more about Northwestern Mutual. Really appreciate you guys taking the time. Thanks,
[00:14:26.920] Chris. Thanks for listening to another episode of Peer Connections by GPFA. We hope you found the
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[00:14:40.160] to reach out to GPFA with ideas or interests for future episodes. And if you liked what you heard
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[00:14:48.280] The opinions expressed in this podcast are those of the presenters and do not necessarily reflect the views or opinions of their respective employer organizations.
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