Insurers May be Able to Enhance Income Without Committing Additional Cash or Adding Significant Risk
March 31, 2020
Amid Market Distress, Opportunities Available in Highly Rated Structured Securities; FHLB Financing Programs May Be a Liquidity Source
HARTFORD, CT – March 31, 2020 —Leading global investment management firm Conning has identified an opportunity that may help insurers enhance portfolio income during the current market dislocation without committing additional cash or adding significant risk to portfolios. market dynamics related to the fallout from the COVID-19 pandemic have led to unusually wide spreads in highly rated (AAA and AA) structured securities, and competitive financing rates from Federal Home Loan Bank (FHLB) programs may offer insurers the liquidity they need to take advantage of what may be a temporary opportunity.
A Conning Strategic Alert describes how market dislocations have helped drive up yields for structured securities while the decline in U.S. Treasury yields has led to falling rates within FHLB lending programs. Insurers who are FHLB members may be able to use loan proceeds to invest in structured securities.
“Recent purchases of highly rated structured securities that are relatively short in duration - less than two years - have produced yields in excess of 4-5%,” said Paul Norris, a Managing Director and Head of Structured Products at Conning. “We suggest insurers consider borrowing from a regional FHLB and invest the proceeds in highly rated structured securities of similar maturity and matching cash flows to potentially enhance income without adding significant portfolio risk.” *
Conning can help insurers without an FHLB relationship learn more about the bank and facilitate conversations between companies and their regional FHLB, said Matthew Reilly, a Managing Director in Conning’s Institutional Solutions group.
* Past performance is not a guarantee of future results. Risks include: Investment Risk - The potentially complex structure of the security may produce unexpected investment results not based on default or recovery statistic. Valuation Risk - Valuation of structured credit products are provided by third parties, based on models, indicative quotes, and estimates of value, in addition to historical trades. There is inherent difficulty in valuing these assets, and there can be no assurances the assets can be disposed of or liquidated at the valuations established, or that published returns will be achieved. Underlying Asset Credit Risk - During periods of economic uncertainty and recession, the incidence of modifications and restructurings of investments may increase, resulting in impairments to the underlying asset value. Economic Risk - Changing economic, political, regulatory or market conditions, interest rates, general levels of economic activity, the price of securities and debt instruments and participation by other investors in financial markets may affect the value of the structured security and all other asset classes.
Conning (www.conning.com) is a leading investment management firm with approximately $179 billion in global assets under management as of December 31, 2019.* With a long history of serving the insurance industry, Conning supports institutional investors, including pension plans, with investment solutions and asset management offerings, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America.
*As of December 31, 2019, represents the combined global assets under management for the affiliated firms under Conning Holdings Limited, Cathay Securities Investment Trust Co., Ltd. (“SITE”) and Global Evolution Fondsmæglerselskab A/S and its group of companies (the “Global Evolution Companies”). The Global Evolution Companies are affiliates of Conning. SITE reports internally into Conning Asia Pacific Limited, but is a separate legal entity under Cathay Financial Holding Co., Ltd. which is the ultimate controlling parent of all Conning controlled entities.
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