This is an excerpt from Neuberger Berman’s recent white paper, “Time to Get Strategic: Emerging Market Debt as a Core Insurance Portfolio Allocation”. For a copy of the full paper and industry analysis, please contact your Neuberger Berman representative.
Recently Neuberger Berman’s Insurance Solutions group conducted an analysis of the U.S. insurance industry’s exposure to Emerging Market Debt given how often the asset class is brought up in client conversations, and also because it appears that the asset class is being inefficiently accessed within insurance portfolios. We identified EMD exposure within the insurance industry based on line-by-line analysis of holdings information and detailed CUSIP data available through industry filings. This approach yielded data on 97.6%1 of the industry in terms of book value of unaffiliated cash and invested assets.
Our analysis confirms a lack of uniformity in EMD exposure among individual companies, and overall allocations appear very low. Figure 1 shows that more than half of life insurers don’t have exposure to EMD, and this lack of exposure is more pronounced among P&C companies where nearly 80% of companies have no EMD exposure. The industry as a whole averages far less and we further observe that allocations appear to decline in conjunction with the size of the insurer. Based on our analysis, we believe insurers are generally under- allocated to EMD relative to a typical institutional portfolio, which means they are not capturing the full opportunity this asset class can offer. Current insurer allocations tend to be heavily concentrated by region, country, industry and issuer—an inefficient and risky way to manage exposure to this asset class.
Given persistently low yields on traditional sources of insurance portfolio income, it shouldn’t be surprising that insurers would want to expand their opportunity set to include asset classes in which they can deploy their capital more efficiently and effectively. We are of the opinion that EMD in particular would be of interest to insurers considering the asset class’s robust performance of late and the general maturation in emerging market economies and their debt markets over the past decade. However, while there appears to be widespread recognition of the benefits of EMD investing among insurers, there is little evidence in their behavior to suggest that they are treating the asset class as a strategic allocation.
While the appropriate allocation will depend on an insurer’s specific circumstances, it’s clear to us that EMD should represent a strategic allocation for most portfolios. Emerging debt markets have evolved over the past 20 years and the securities that today comprise EMD— corporates and sovereigns, in hard and local currencies, with issues across the ratings spectrum and of various maturities—offer insurers unique risk/return profiles and diversification benefits along with generally higher yields than can be found in traditional insurance portfolio investments (see Figure 2).
Given their limited historical exposure to EMD, many insurers may lack the in-house expertise to manage an EMD portfolio. We suggest partnering with a dedicated and well-resourced EMD platform that understands the intricacies of insurance portfolio management offers access to this asset class with portfolios that can be customized to address each insurer’s unique objectives and constraints.