The first quarter launched 2021 on a positive note. However, the U.S. Federal Reserve’s response to the crisis has many investors concerned about inflation and rising rates. In this issue of Insurance Quarterly, our strategists and portfolio managers offer their expertise in valuations, credit and interest rate risks, and offer a variety of opportunities for finding yield and value across the asset class spectrum.
As the saying goes, there’s no rest for the weary, and many bond investors understand that feeling right now. After spending the last decade navigating a difficult fixed income environment, they’re now faced with new (and historic) challenges. Yet, those investors willing to expand their strategies can likely still achieve their investment goals. Download our latest market bulletin to read our take on strategies for maneuvering through the unyielding bond market.
Although institutional investors’ allocation to publicly traded investment grade (IG) bonds is essential for liquidity and stability, yields today are historically low. The typical corporate pension fund, for example, with a fixed income allocation of close to 50% and long-term performance goals averaging 6.5%, faces a wide return gap to be filled. A portfolio of mid-sized allocations to IG private credit could generate a substantial yield premium of 0.4% to 1.0% over core fixed income, with similar or even improved credit risk. Such a “sweet spot” portfolio delivers broad diversification while also enabling participation in the most attractive large deals.
Proposed changes to RBC bond factors will increase required capital and decrease RBC ratios for U.S. life insurers. The impact of the proposed changes is uneven, as some asset classes are targeted for much greater RBC charge increases than others, while some even have RBC charge decreases. The proposed RBC changes will result in much more flexibility in what constitutes an RBC efficient portfolio and RBC focused insurers should consider changing their strategic allocation and increasing tactical flexibility.
In most fixed-income markets we are back to where we started in 2020 with low rates, tight spreads and warnings from some that asset prices across sectors may be overheated. What are fixed-income investors to do? For MIM’s Private Structured Credit strategy, it’s back to the basics – trying to identify higher-yield, investment grade opportunities that don’t fit neatly into the traditional asset-backed securities market or private securities market and work with borrowers to find financing solutions for these non-conforming sectors.
Matthew Daly, Head of Conning’s Corporate and Municipal Teams, and John Petchler, Director, Private Placements, discuss how private placements may offer insurers greater yield compared to public issuance of similar quality and duration. They also discuss the sector’s investor protections and how private placements may enable insurers to customize maturities to match liabilities.

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