As the current low yield environment is expected to persist, insurers have been seeking ways to generate higher yields, and sub-investment grade bonds may fit the bill, says Simon Richards.
Historically, despite investing a significant proportion of their balance sheets into fixed income assets, insurance companies focused almost solely on government bonds and investment grade corporate debt. More recently, as derivatives have made it easier to hedge the overseas interest rate and currency exposures arising from investing in overseas bonds, insurers have been able to diversify their exposure into different issuers, sectors and economies.
However, BBB- remains a psychological cut off point for the majority of insurers and even those that did permit exposure to sub-investment grade—‘junk’ or ‘high yield’—bonds within their portfolios tended to restrict those holdings to bonds that had recently been downgraded from investment grade status, the so-called ‘fallen angels’.
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Junk bonds, BNY Mellon, Simon Richards, Insurance