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Politics Are Key Factor in Policy Progress

As we approach the culmination of the biannual event known as “the most important election of our lifetime,” it is an opportune moment to assess what this election has in store with regard to the medical professional liability community.

Status Quo or Radical Change for MPL? The Results of the 2024 Election

Thursday, November 14, 2:00 p.m. ET
MPL industry government relations experts offer a whirlwind tour of the 2024 election results and what that may mean for MPL stakeholders.

 

ASSET SIDE

‘Higher for Longer’ Creating Considerable Opportunities for Insurers to Add Yield

Shifting Market Expectations Prolong Higher Reinvestment Yield Environment


By Peter Cramer, Louis Pelosi, Nitin Chhabra, and Thomas Klem
 

Macroeconomic conditions and a shift in market outlooks have created considerable opportunity at the mid-year point for insurers to increase income generation. Such opportunities might encompass both the public and private markets—with the latter including investment grade private credit, direct lending, and real estate debt.

Strong growth, persistent inflation, and a cautious U.S. Federal Reserve have all contributed to the market walking back its expectation for aggressive rate cuts in 2024. This has resulted in a higher-for-longer interest rate environment and prolonged the opportunity for insurers to add attractive yields to their portfolios in both public and private markets across the curve.

Despite the inverted yield curve, given the high absolute level of rates we’ve increasingly seen clients thinking about extending duration on the margin within their public fixed income portfolio, enabling them to lock in higher yields for longer. While there is much uncertainty surrounding the future path of interest rates, what is certain is that any such move to extend duration should include careful consideration of the amount of liquidity needed to be held in adverse scenarios—be it a natural catastrophe for property and casualty insurers or a mass lapse event for life insurers—along with the available sources of liquidity including operating cash, investment income and lines of credit.

While rates have increased, spreads have continued to tighten on strong corporate fundamentals and technical tailwinds as the demand for income remains high from all types of investors in this space. The opposing moves of rates and spreads have created a dynamic where spreads as a percentage of all-in yields are at historical lows, even with record investment grade corporate bond issuance in Q1 2024. As a result, we generally remain cautious on credit exposure as spreads do not appear to be pricing in potential risks and headwinds of a slowing consumer in the coming year, as evidenced by the diminishing ratio of option-adjusted spreads to yield-to-worst.

 

 

Current opportunities to increase investment income

We see areas of opportunity for insurers across the spectrum to maintain quality positioning while providing attractive levels of investment income not seen in many years:

  • Within public fixed income, securitized assets (mortgage-backed securities, asset-backed securities, collateralized loan obligations) offer potential relative value opportunities in the investment grade part of the market. Meanwhile, narrowly syndicated credit continues to offer a significant yield advantage above high yield bonds and broadly syndicated loans in the non-investment grade space.
  • We continue to see strong relative value in investment grade private credit, particularly in the intermediate part of the curve, due to the inverted yield curve and lower competition for intermediate duration bonds. As these bonds primarily come with fixed rates, the opportunity to “lock in” these yields is compelling for all types of insurers. Within the investment grade private space, we note specific interest in private structured credit, specifically asset-backed finance and fund finance/net asset value lending.
  • Also on the private credit side, we are seeing increasing levels of interest and allocation to direct lending as a result of double-digit yields and the potential for downside protection in this space, given strong levels of collateralization and direct lending’s senior position within capital structures.
  • Finally, while real estate headwinds in certain sectors have kept some investors at bay, we’re observing more activity with insurers on the real estate debt side as a result of the yield profile of the asset class and capital efficiency in many regulatory regimes.




The remainder of 2024 is likely to bring surprises stemming from any number areas, including the degree of success of central banks to curb inflation while increasing growth, the upcoming U.S. elections, and, perhaps, even from updates on the insurance regulatory front. These surprises have the potential to negatively impact insurer investment portfolios. Fortunately, notable opportunities exist for insurers to meet their income and total return objectives while minimizing the negative impact of adverse market events.


Source: Bloomberg, 2024. Investment grade credit ratings of our private placements portfolio assets are based on a proprietary, internal credit rating methodology that was developed using both externally purchased and internally developed models. This methodology is reviewed regularly. More details can be shared upon request. There is no guarantee that the same rating(s) would be assigned to portfolio asset(s) if they were independently rated by a major credit ratings organization.

 


Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association.

The information provided is intended for informational purposes only and represents the views and opinion of the author(s), which may differ from those of other investment teams at SLC Management and its affiliates. The material does not consider the suitability or needs of any person or entity, and is not a recommendation in any asset class or strategy. Diversification and asset allocation do not protect against loss nor guarantee returns. Any financial indices referenced as benchmarks are provided for illustrative purposes only. The use of benchmarks has limitations because portfolio holdings and characteristics will differ from those of the benchmark(s), and such differences may be material. You cannot make a direct investment in an index. All referenced indexes are shown for illustrative purposes only. Factors affecting portfolio performance that do not affect benchmark performance may include portfolio rebalancing, the timing of cash flows, credit quality, diversification, and differences in volatility. In addition, financial indices do not reflect the impact of fees, applicable taxes or trading costs which reduce returns. No representation is being made that any investor will or is likely to achieve profits or losses in any asset class described or based on any benchmark. Past performance is not necessarily indicative of future results.

The information provided may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. Efforts have been made to ensure that the information contained in this report is obtained from sources believed to be reliable and accurate at the time of publication. However, SLC Management does not guarantee its accuracy or completeness. All, opinions, commentary and information is subject to change and SLC Management accepts no responsibility for any losses arising from any use of or reliance on the information provided herein. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.


 
Peter Cramer is a Senior Managing Director, U.S. Insurance Asset Management, SLC Management.

 
Nitin Chhabra is a Managing Director, Head of Insurance Solutions, SLC Management.

 
Louis Pelosi is a Managing Director, Client Solutions, SLC Management.

 
Thomas Klem is a Managing Director, Head of Institutional Client Experience, SLC Management.
The remainder of 2024 is likely to bring surprises stemming from any number areas, including the degree of success of central banks to curb inflation while increasing growth, the upcoming U.S. elections, and, perhaps, even from updates on the insurance regulatory front.