Seeing credit through fresh eyes

Insurers should be taking a fresh look at credit, seeking out the opportunities to include carefully selected quality assets in their portfolios. This was the key message that came out of an Insurance Investment Exchange roundtable held in conjunction with Loomis Sayles Investments, writes David Worsfold, Contributing Editor.

Entitled ‘The Contours of Credit: Risks and opportunities for insurers today’, the Loomis Sayles team and a range leading market practitioners started by setting the macro-economic context with the help of Jon Levy, global strategist for European markets.

He cautioned against being too quick to compare economic conditions today to those of the 1970s, although he conceded there are parallels, especially the battle to prevent a wage/price spiral taking hold. He highlighted the significant squeeze on real wages since the global financial crisis in the UK, in particular, as one of the factors to watch as pressure to close the gap could add to inflation.

 One of the challenges facing central banks looking at global economic trends is that there is almost too much data, he said, leading to hesitant responses offering little conviction. Within that hazy picture, Levy said there was a reduced prospect of a downturn in America, although Europe and China offered a less certain picture. Inflationary pressures seemed to be easing which would, in time, take the pressure off interest rates.

Having set the scene, the discussion then moved on to looking at where insurers might find some of the best opportunities in credit.

Emerging markets should be looked at with fresh eyes, said Elizabeth Colleran, portfolio manager for emerging markets debt portfolios. One of their strengths was the scope for diversification by both region and sector. This created opportunities to engage with fast growing economies and key sectors within them where investment grade corporate credit is to be found. With over 800 issuers across 65 countries where growth over the next five years is expected to be double that of developed economies, the opportunities should be plentiful, projections underpinned by a wealth of International Monetary Fund data.

She highlighted the opportunities to find incremental spread premium compared to similarly rated corporate credit in developed markets and tackled the fear of defaults, which often deters institutional investors. Taking out Chinese property, Russia and Ukraine, Colleran said the default rate for high yield corporate debt across emerging markets stood comparison with the United States.

She demonstrated how a portfolio of EM debt could be structured to meet a range of institutional requirements, including struct ESG targets, regulatory and currency constraints.

Another opportunity that insurers should look at more favourably lies in private credit, said Chris Gudmastad, portfolio manager and managing director of private credit.

The “lower for longer” interest rate environment had driven larger allocations to private credit but the current market conditions still offered a range of high quality opportunities, especially in private fixed income which he said was growing as it evolves beyond the conventional private placement market into new sectors, geographies and structures.

He highlighted specialty finance as one such opportunity, saying it offered the potential for diversification with yield benefits mitigation of downside risk, all wrapped up with an attractive complexity premium for the right assets. The growth in this class has been fuelled by bank retrenchment and the rise of alternative-owned insurance companies.

Gudmastad took the roundtable participants through a couple of case studies that illustrated the potential attractiveness of well-structured, highly-rated private fixed income opportunities.



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