The credit quality of bonds held by insurance companies is dropping as insurers chase higher returns.
Researchers found that the average credit quality of the fixed income portion of insurers’ portfolios fell between 2010 and 2016.
Although this fall was partly organic through downgrades, it also occurred because some insurers actively moved down the credit spectrum to compensate for low returns offered elsewhere in fixed income.
The researchers – who are Invesco, the fund manager, and Hymans Robertson, the investment consultancy – said senior secured loans were in more demand from insurers as a result of this change in credit quality.
Senior secured loans are loans to corporates in either US dollars or euros that have floating interest rates and are rated sub-investment grade. However, they sit higher up in capital structures compared to higher yield bonds.
Ed Collinge, head of UK insurance at Invesco, said the asset class could offer attractive risk-adjusted and capital-adjusted returns, low volatility and diversification.
“With the continuing challenges posed by the low yield environment and restrictions from Solvency II, it is likely insurers will increase allocations to this asset class,” he said.
The whitepaper (‘Sub-investment grade opportunities for insurers: Senior secured loans’) shows that returns of European senior secured loans have been positive in all but three of the past 16 years, as measured by the Credit Suisse Western European Leverage Loan Index.
Last year, for example, the index returns 6.5%, which the US counterpart index, the Credit Suisse Leveraged Loan Index, returned 9.9%.
The whitepaper follows a recent report from BlackRock that showed insurers were increasingly turning to non-traditional assets.
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