Senior secured corporate loans, Asian credit and equity-friendly Solvency II solutions, are asset classes receiving a lot of interest from the insurance market, according to investment experts at BNP Paribas Investment Partners.
Speaking to Life Insurance International, Sophie Debehogne, customised & fiduciary solutions investment specialist at BNP Paribas Investment Partners, said insurers are facing many challenges, with the first one being to find additional yield.
Debehogne said insurers’ current fixed income investments – with still relative high coupons – are progressively maturing, and they must find new sources of return in this low-interest rate environment.
Debehogne said: “Insurers are therefore looking to diversify their portfolios more. At the same time, they must deal with the new constraints coming from Solvency II. To reach a good solvency ratio, they need to meet capital constraints. So, they have to find investments and asset classes offering a good trade-off between return and solvency capital requirement (SCR).”
She added: “We see more and more insurers asking the opinion of companies like ourselves to review their asset allocation and come up with a number of suggestions in terms of asset allocation, meeting their specific constraints in terms of return, SCR and insurance yield.”
According to Debehogne, asset classes receiving a lot of interest from the insurance market are:
1. Senior secured corporate Loans
2. Asian credit
3. Equity-friendly Solvency II solutions
Explaining the attraction of these asset classes, Debehogne said senior secured corporate loans present interesting return and SCR characteristics.
She said: “They offer a spread similar to high-yield bonds with a higher historical recovery rate. Additionally, a large part of the loans market is unrated and therefore interesting under Solvency 2.”
In her view, Asian credit also presents interesting return and SCR characteristics. Debehogne said Asian credit investment grade (USD) hedged in Euros offers an interesting spread compared to European credit investment grade despite the cost of currency hedging.
Anton Wouters, head of customised & fiduciary solutions in BNP Paribas Investment Partners’ Multi-Asset Solutions team, told Life Insurance International the question is how insurers can increase their exposure to equities within the Solvency rules.
Debehogne continued that the idea behind BNP Paribas Investment Partners’ solution is to combine an equity portfolio with an overlay that provides structural protection and will reduce the drawdown of the portfolio, allowing for an SCR reduction.
She commented: “The objective of such solution is to target a return close to equity but with a lower solvency capital requirement.”