Executive Spotlight: Lale Topcuoglu, Managing Director, Head of Credit for Swiss Re Management

Stewart: Welcome, welcome, welcome to another edition of the InsuranceAUM.com podcast. My name is Stewart Foley, I'll be your host. And I am joined today by a very special guest, Lale Topcuoglu, head of credit, managing director at Swiss Re. Lale, welcome. How are you?

Lale: I'm good. Thank you so much for having me. This is so exciting.

Stewart: I am so excited. I can barely contain myself over here. I want to start this off the way we start them all. Right? So what's your hometown? What's your first job? And what's a fun fact?

Lale: Hometown, Izmir, Turkey.

Stewart: All right.

Lale: First job, analyst, Goldman Sachs.

Stewart: That was your first job ever?

Lale: That was my first job ever. Yeah.

Stewart: Wow. There you go. It's a good start.

Lale: A fun fact. I really like Turkish sappy soap operas. It's my way to de-stress.

Stewart: All right. I've never seen one. That is a fun fact. That's awesome.

Lale: It's a fun fact. It's a silly fact. But there's something about it. Maybe sometimes I get homesick, but I just love watching it.

Stewart: That's cool. So I want to talk to you, you've made some posts on LinkedIn lately and I'd love to talk to you about those. But before we get going too far, I want to talk markets just a little bit. And you have this thing you call a gray swan scenario. Can you talk a little bit about what you mean when you say, your gray swan scenario?

Lale: Well, the black swans are really hard to call. So the gray swans, I think of them as things that are just so obvious when you go through your day jobs, day in, day out, but you're like, "This is going to come and bite at some point in time." So my gray swan scenario is, and I've written about it too, so I'm afraid sometimes I feel like a broken record, but I had two incredible mentors throughout my career. And I grew up under them really understanding fundamental credit analysis. So old school, here's your income statement, here is your cashflow, here's your balance sheet. And one of the things that I really struggle with over the last several years with the central banks flooding the system and all this QE we've seen is that I really feel like the fundamental analysis has gone out the door. Everybody has become a macro analyst, and the reality is it's so hard to call these macro calls. What the interest rate forecast is going to be? What the inflation forecast is going to be? And sometimes I also wonder, does it really matter?

Stewart: Exactly. Yeah. I get it.

Lale: There's so much brainpower spent on this, right? It consumes you on these projects. But nonetheless, taking a step back, one of the things that I struggle with is because the fundamental analysis has just gone out the door with QE, ‘Rising tide lifts all boats’ and et cetera, we got into a regime where I find adjusted revenue, adjusted EBITDA, proforma adjusted EBITDA, community EBITDA. We all made fun of it, but in reality, those deals got done.

Somebody bought them. And it's adjusted earnings and it really is frustrating. And my gray swan scenario is that I think eventually when the liquidity, the slush of liquidity we have, and clearly there's still in the system because you can see the valuations are still pretty expensive.

Once that gets out, I do think people have to go back and think about the fundamentals. Like what does this company generate? And I do blame our industry for it, because we created, I think, the structural bias where income statement and balance sheet are the two statements people look at. Nobody actually looks at the cash flow. Which, that's actually where the hidden gems are. But if all of our deals get sold of adjusted revenue multiples, adjusted EBITDA multiples, and then the debt is, you just, "Let's look at the leverage metrics." Not a whole lot of people look at the cash flow. So my gray swan scenario is that when the liquidity goes out, I think people are going to realize there's a whole lot of capital that has flown into companies and asset classes where you went into capital structures with very unrealistic assumptions. 
And there is no way the company can grow into that capital structure. Because you think you bought it at 7 times, but the number is so grossly adjusted that maybe, in reality, you bought it at 12 times, and there is no cash flow that can actually fund that company.

And I think that will really cut through across asset classes. Now, when will that happen? I have no idea. And I think that's the struggle. Everybody always asks, "What's the catalyst?" Oh, my god. I don't know what the catalyst is. What was the catalyst with Enron? What was the catalyst with some of the other companies that went bust? One day there's just less buyers than sellers and then suddenly the risk-off environment starts. Don't know.

Stewart: But don't you think that a lot of capital flowed into deals because the rate market in public securities was so low that it just pushes capital to deals that now that interest rates on IG fixed income are back to a level where I can buy straight-down-the-fairway fixed income, and raise my book yield, maybe I don't have an appetite for some of those deals. I mean, is that a concern?

Lale: It's less... So the incremental demand, it's less of a concern for me only because if you think of some of the, especially on the private side, these assets get allocated on a longer period of time. And on the public side, sure you can decrease your allocations to high yield or et cetera. You can play around a little bit, but most companies don't really make big knee-jerk reactions. I think about a lot of the... If you think of the leverage loan transactions or even the high yield transactions, I almost think of them as vintages. So there's a cohort of vintages that was really underwritten under this extreme low rate environment that probably is going to disappoint folks should some of these companies run into trouble. And I thought you were actually going to ask me something. I thought you were going as like, "Well, how come people bought these?" I always joke about it because I think everybody thinks they're smarter than somebody else.

Stewart: Right. Of course.

Lale: And then everybody I think also thinks they can just get off the bus before anybody else. The reality is, and maybe I'm biased because I've sat in the portfolio management seat, it never works out perfectly. There has never been a scenario in my career where I'm like, "A-ha." Like, "This is why we were sitting in so much cash and now I can buy it." It never works that way. You always think you're hiding out on a relatively safer asset class, or you put your money in there but then rates move up and suddenly you're like, "I can't move this block because I have massive losses on here. I am stuck." But then there's all these opportunities now. Suddenly everything yields... Let's pick up a number, 8%. So you're like, "Well, what do I do with this cohort? I'm stuck."

And I think people sometimes don't appreciate how complicated... And look, I just entered the insurance industry about two years ago. How complicated our operations could be. We have flexibility obviously, but I think some of the things that... If you watch financial news, it just sounds so easy. But there is a practical and mechanical part of it. The way the sausage is made, it takes time. So I always say, you got to be about three steps ahead of everybody else in this business to be able to actually capture the opportunity set that the market may present to you. But it's challenging. It's not easy.

Stewart: What do you think is not priced in right now, in 2023? I mean, is there something that you think is just wrong, that's not priced in? Or something that's priced in that maybe shouldn't be?

Lale: So I think there are pluses and I think there are some negatives. So I think the pluses are clearly some of the major tail risks that we were concerned about, perhaps at this point has eased off a little bit. So a massive energy crisis in Europe, sort of the geopolitics even taking a step worse. China obviously being in a shutdown for a much extended period of time. So some of these big major tail risks, that could be a very big risk factor have really slimmed down. I don't think they've gone away, but let's just say the probability has shrunk. With that said, I struggle with the current valuation and the rally we've seen. And now I fully also acknowledge that day to day you can look at the market movements and there's sometimes no good... It's not good quality information in there. It's just, the market is trading. It is what it is.

And sometimes I think you just have to take a step back and take a longer view. It's hard, but I think it's important. And I think what to me is interesting is that clearly growth expectation is a lot better than everybody expected. And I think the risk is that we may be in a sustained higher rate environment much longer than people expected. And I'm not even saying more hikes. I'm just saying we can just sustain the rates higher. And this ties into my gray swan scenario is that, that can cause capital structure as your enterprise valuations shrink notably, right? Because it's an entirely different scenario to buy into 5, 6 times levered capital structure on all those adjusted numbers at an all-in 4% borrowing cost, versus 8 times borrowing costs with potentially some sort of a margin compression and inflationary pressures coming down the pipe.

Stewart: Yeah, absolutely. And so you'd mentioned in your notes that you're always concerned about liquidity in the market and the growth of markets has coincided with bank regulation. Can you talk a little bit about that?

Lale: Yeah, I think I'm scarred from my sort of... Obviously it's an extreme case, right? But if you remember the financial crisis, there were days you couldn't sell a million dollars in bonds. Yeah? It was just like, "Call us back some other time."

Stewart: Lale, this is the reason I'm gray. GFC is the reason. I had no gray hair when that thing started.

Lale: It kind of leaves a mark in your mind once you go through that. And I think being also an insurance asset manager, I think one of the... I generally joke but I say whatever we buy, you're going to own it forever until it matures. Let's just run with that assumption. So there is no short-term opportunity trade. I don't ever want my team to think, "Oh, we can just buy this for a short term." Because who knows what our limitations are going to be, whether it's the rates or regulatory change or whatever it may be that you may just not have that flexibility. So my number one rule is like, you don't love it? Don't touch it. There is no, "I'm lukewarm, let's do this deal" type of a negotiation. So going back to liquidity, what I more concerned about is if you sort of look at the growth in the credit markets, whether it's just the IG market, the high yield market, the loan market, and then it extrapolates from that. Every market has grown.

The financial plumbing is still the same. You still got to call a Goldman Sachs, JP Morgan, Bank of America and say like, "Hey, I got to trade." And the banks don't have the balance sheet anymore. Yes, I think people will now say the private credit guys are coming in and they're like this new pocket that can take advantage of opportunities, or the asset managers have gotten so big they can take these opportunities.

But the reality is, I don't know. Because when... God forbid, I hope we never repeat something like GFC again. But in extreme stress environments, I don't want to bank on, “So-and-so may come in and be the bid.” And frankly, you probably won't like the bid to begin with. But that old transition mechanism through the brokers, it really is the same pipe. And if not it's a smaller pipe. But the assets that we now deal with is multiples of it. So finding the next liquidity bucket is going to be challenging. And I think it's also challenging for probably smaller guys too. If you have a limited balance sheet, who's going to tap it?

Stewart: Right. And under duress everybody gets alligator arms, right? I mean, everybody's like, "Whoa, wait a minute. Oh, yeah. I had a bid yesterday but not today." Right?

Lale: Yeah.

Stewart: And it dries up quickly, right?

Lale: Yeah. But the best thing about being an insurer is that, I think for our industry, I see generally those markets as an opportunity. Because unless something has gone wrong awfully, you shouldn't ever be a forced seller. And I think that's an opportunity for the industry, but you just have to have your ducks in order such that you do have some optionality within your cash position, et cetera, where you can capture those opportunities. And I think that just requires a solid investment process and good planning.

Stewart: What about, can you talk a little bit about it? I don't know if this is good to go here, but you mentioned some of the mini-crises that we've seen. Crypto, China real estate, pressure on REITs. What lessons are there in those?

Lale: I think the lessons are, there is definitely leverage in the system. And I think there's also lessons of what I talked about again, my gray swan scenario. Where you can see there was so much liquidity that the liquidity was chasing poorly structured deals. So China, offshore, real estate. You can look it up. Keepwell agreements. It is the worst agreement on Earth. Why would anybody sign on on that is mind-boggling.

Some of the EM renewable deals, we've seen pretty poor structures as well. So those are poorly structured deals which, that's the emerging market world. I can assure you it doesn't take much than a few Googling search, or you can look at some of the Bloomberg news, you can see that we see poorly structured deals in our own markets. You can look at the leverage loan market that everybody looks at. You can look at the high yield market. There are lots of poorly structured deals that just kind of float around. And I think what happens is what you saw with some of China real estate, et cetera, is when the capital gets pulled and it comes under the stress, it exposes all these weaknesses. So again, that ties onto my gray swan. It's just the question is, as the liquidity comes out, whether we're going to get exposed or not. South Korea, I don't know how many people have seen it actually, I thought it was absolutely fascinating actually. This happened at the end of October. It's a double A rated country. They almost had like a mini GFC. Where there was a default on a loan and basically the CP market stopped functioning. The rates went on and basically the government had to throw the kitchen sink at it to sort of make the market function again. Now that tells you that there is definitely leverage in the system.

Stewart: For sure.

Lale: And everybody knows and everybody would say like, if you read the sell side research everyone says, "Well, this is a very leveraged economy." You're like, "Yes, clearly it is." But it's also interesting that it's a double A rated country. Why are these things happening? Maybe I'm naive, but I would just say if you're a double A rated, I would assume these things shouldn't really happen. Your system should not stop functioning. Your financial system. So to me, I guess where I'm going with this is that everybody thinks about the GFC. And I think GFC is very, very different. I think the GFC, the biggest difference is people bought products that were worthless. So I think this is different. I'm not saying people are buying products that are worthless. I'm saying people are probably substantially overpaying for things. Either because they're trying to chase yields or for whatever reason it may be.

I think that's a very different proposition. And then when people compare it with GFC, one of the other sort of selling points that we hear is that everybody says, "Well, everybody was so leveraged during that time that leverage no longer exists." And that I think is what I would push back. Leverage definitely exists in the systems. It's just perhaps got sliced and diced and got pocketed away. And until we see the rubber band really stretch, we may not see the extent of it. And I think some of these, I guess you can call them confirmation biases, where I just see... We just spit these things around and we repeat them over and over again. And sometimes I feel like it's make-believe. There's got to be leverage in the system, because if I'm seeing poor deals getting circulated everywhere, I can't be the only one, because I probably see only a fraction of the deals that gets done.

Stewart: So let's just change gears just a second. You've said in other interviews the importance of networking. And you are on the board of IWIN, which is an organization that we strongly support. The Insurance Women's Investment Network. You don't have to be a woman to join. I'm a member and proudly so. So can you talk a little bit about IWIN. And what they're doing and how you view networking and how you network and all of that?

Lale: So I'll start with the IWIN piece. So our goal is to get women in insurance investment management together. Get to know each other. We probably all struggle with similar things, have a discussion and then work with our partners like yourself to host events where we continue our education. They can be educational events, they could be market-related events, and then also continue networking. This is like a snowball effect. It's absolutely free. There's no membership fees or anything. So if anybody is interested, please do sign up for it. That'll be fantastic. Networking. So networking. I think I've gotten better at it over the years. It really, I find how our industry works. I find that it's through networking, is the way you get your name out, the way you can be a contender for bigger jobs, the way you can be a contender for being a mentor.

And also I think it's the way you learn more. See what your peers are doing. I'm quite shameless in one thing, which is if you are doing something that's exceptionally good, I have absolutely no shame in replicating that on my side. I don't want to reinvent the wheel. If you figure out something that works, that achieves results, whether it's an investment process, an organizational structure, the way you do... Whatever it may be. I am totally on board with it. I will give the person credit or the company, but I will totally replicate it. And I've done it multiple times. And the way you get that information is through networking.

Stewart: Absolutely.

Lale: Just, you got to talk to people. The key is you got to be open. And I think that's where people struggle. I think, and I don't know if this is culturalism, because I'm Turkish, so maybe I approach it differently. I think the moment you approach networking transactional, it's dead on arrival.

Stewart: I think that's really insightful.

Lale: I think many people approach it as transactional.

Stewart: Yeah. Like, “I'm looking for a job at this place. Do you know anybody?”

Lale: Yeah.

Stewart: I always tell my students, build your network when you don't need it. Don't build your network only when you're looking for a job or only when you're trying to sell an account or whatever. It's important. And I think IWIN does an amazing job. And Sarah Marschok at Wellington just does an amazing job. And Laura at BlackRock and others. I mean, Sara Bonesteel at Prudential is on their board.

And I find that the folks who are involved in an organization genuinely want to help each other. One of the things we've tried to do is we do events sometimes with CFA societies and to get IWIN involved, because to your point, it is free and there's not a full-time staff. And so whatever we can do to help promote your goals and objectives. But I also think, too, it's about making folks who are younger in their careers, earlier in their careers, aware of the opportunity set, right?

Lale: Yeah.

Stewart: I mean coming out of school, I can't imagine that you're thinking, I got to get to Swiss Re."

Lale: Well, also I got to get into an insurance company is a whole another thing, right?

Stewart: Right. And I can't tell you how many... It's like. "How did you get in?" And the answer starts with, "Well, I never thought I'd be in insurance." Always. And I do think that it's important to have those, to be able to reach out and bring people along and share your knowledge, and your willingness to hop on this podcast with me is really a prima facie case of your willingness.

Lale: That's super kind.

Stewart: I mean, you've been all over major news outlets and I appreciate that and you've been super open about it. And I want to ask you a question. You were quoted as saying, "Because I'm gay, I felt my successes were always discounted by my family." Can you unpack that and talk a little bit about it?

Lale: Oh, boy. So actually this ties into the whole media story. My family struggles with it. They've come a long way. But it's one of the always-challenges where my family would say things like, "Well, if you were just back home, you could be so much more successful." And I'm like, "I did pretty okay."

Stewart: Yeah, based on my vantage point you are, Lale, honestly. Everything seems to be going good for you in my mind.

Lale: And I also shouldn't say this, but I don't want to come home. And I don't want to get compared to so-and-so. Like there is no end to comparison. And I know we always do it. You're like, "Did you hear so and so got this promotion?" And it's human nature, I get it. But one, it's not really helpful. And two, there's no end to that. You can waste so many hours to it. But of course, maybe it's a cultural thing. My family does that comparison on and off.

And my successes has always been discounted. Part of it, I think they still don't understand what I do. So first, I think they thought I was a bank teller while I worked at Goldman Sachs. And now I moved to insurance, so they probably think I'm an insurance salesperson. Knocking on doors. But joking aside, it's just, I'm in this field that it's hard for them to understand what I really do. And then I think if you add in my personal life, it's kind of, for them just seems like odd.

Stewart: If you want to give them my email, I will attest to the fact that you're a badass in this business.

Lale: That's very kind. Actually, the best thing that happened to me, and I owe Bloomberg for this is, once I started getting on Bloomberg, it actually earned me the seal of approval from my family. They were like, "Media thinks you are good. You must be good." And it was fascinating. It was just eye-opening. Like nothing has changed about me. I just now happen to have makeup on and I'm on TV.

Stewart: Just, hey, listen. Wait till they hear this podcast. They'll be even... You think Bloomberg was impressive? Just wait till they hear this.

Lale: Exactly.

Stewart: That's right.

Lale: Exactly.

Stewart: So you posted on LinkedIn some notes that your wife left you?

Lale: My wife left me.

Stewart: When I know you had a family emergency and she had to go out of town for a while. And there was this list of stuff that like trying to take care of the kids. And I can attest to the fact that if I was left that list, it would not have been okay. And you really expressed your gratitude when you put it out there.

Lale: I love the list.

Stewart: You got to tell our audience a little bit. Just tell them about the list.

Lale: Sure. And then they can look at my LinkedIn post. It basically, my wife had a family emergency. She had to go home, which is Oregon. And we don't have any family support. So my family lives in Turkey, her family lives in Oregon. So on the East Coast, we have no family support. So then I need to stay at home, take care of two kids. And I have two kids, a teenager and a younger one. And she literally writes me a prescriptive to-do list. Because just like in any relationship, she takes on more of the house stuff. And she's a lawyer, she works. But I take on some of the other tasks. But our sort of house duty sharing is probably more like 80:20, 80 falling on her.

And there are things on that I have absolutely no clue. Like what medication our child takes, or where would I find simple things in the house. Honestly, I have no clue. And I can't be the only one. So whoever's listening to this one, I'm pretty sure there's a few of you that are like me.

Stewart: One of the people listening like that is me.

Lale: To-do list, right? Monday at this specific time, school drop off, school pickup. And our teenager has this doctor appointment or this. And it just goes on and on. But the best part for me was her highlighting that my six-year-old needs a bath.

Stewart: That's awesome.

Lale: Because I would totally forget about it. She's like, "Needs a bath." And it's like all in caps and underlined with a star. And what's even funny is, we did the bath and then she came literally on day seven. And I forgot on that night and she's like, "Did I need to write that as a recurring event?"

Stewart: That's awesome.

Lale: And then I was like, "Yeah." But I'm like, "My six-year-old bathes in every one and a half weeks." She's like, "That is a tall tale."

Stewart: That's amazing. I can't believe how fast this has gone. We're coming up on the end of this thing and I guess I'll go back to a question that I ask a lot of people. So you went to Mount Holyoke, right? Is that right?

Lale: Yes. Yeah.

Stewart: Do you remember your graduation day?

Lale: I do.

Stewart: So I was a professor for a while and I sat through a lot of graduations. And so I'm going to paint this picture for you. So they call your name, they mispronounce your last name obviously, and-

Lale: They actually didn't.

Stewart: See, I've been practicing for a month. So you go across the stage, they hand you your diploma, you get a handshake and a quick picture and down the stairs you go. And at the bottom of the stairs you run into you today. What advice do you give your 21-year-old self? And by the way, things have worked out pretty well for you.

Lale: So I'll start with this. I mean, things worked out pretty well for me. I think life has valleys and peaks. I've also been quite open about mental health and how I broke down too. So it's no secret. I think I probably would say, just keep plowing through. Just have the self-confidence. Don't self-doubt.

Stewart: I love that. I've been very open with mental health also.

Lale: Oh, cool. What is that? You got to explain it because nobody's going to know what that is.

Stewart: Yeah, I posted, I've got a 988 and a semicolon tattooed on my forearm. And the 988 is the national mental health crisis hotline number.

Lale: Wow.

Stewart: Right? I think being able to take the stigma away from having a conversation about mental health is really important. And I think it's been a part of my life. And I've been very open about it. I think we all face our challenges and we all have those things, but just keep taking the next step. Right? I think it's really important.

Lale: Knowing to ask for help is really important. And then I know in our field at least, I find people see it as a weakness because it's so competitive. But our business actually also, and I can only speak to this, our industry like financial services. Because that's the only place I worked. So I don't want anybody to think it's only in our industry this happens, it obviously happens everywhere, but I can only speak to my experience.

My experience suggests that if you let sort of the stress of the markets and the P&L generation, all these things consume you, it will chew you up and spit you out. And you will have no soul, nothing left. Which I think brings me to say is it's important to know when to quit. I think it is equally important to know to ask for help. And I know this is an incredibly privileged thing to say, but if you have the ability, picking the right employer and the right corporate culture, I think is critically important.

Stewart: I think that's really insightful. Really insightful. You have exceeded... I had massive excitement and expectations for this podcast and you have handily exceeded all of it.

Lale: That's really kind. Now you know it. I can talk forever.

Stewart: No, it's great. And I mean, I'd love to have you back. You're the real deal.

Lale: That's very kind, Stewart. Thank you.

Stewart: Thanks for being on. I really appreciate you taking the time. I know you've got 1000 things going on, and just thanks so much.

Lale: Really appreciate it. Thank you.

Stewart: We have been joined by Lale Topcuoglu. Managing director and head of credit at Swiss Re. Lale, thanks for being on. Thanks for listening. If you have ideas for podcasts, please email me at podcast@insuranceaum.com. Please rate us, review us, and like us on Apple Podcast. We certainly appreciate it. Thanks for listening. My name is Stewart Foley and this is the InsuranceAUM.com podcast.

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