A.M. BestTV: Insurers Boost Holdings in Collateralized Loan Obligations, Say A.M. Best Analysts

Business Wire

OLDWICK, N.J.--(BUSINESS WIRE)-- In this ^A.M.BestTV episode, Ken Johnson, senior director, and Jason Hopper, associate director, A.M. Best, examine insurers' growing interest in collateralized loan obligations (CLO), including the role CLOs play in diversifying risk and responding to interest rate fluctuations. Click on http://www.ambest.com/v.asp?v=clo518 to view the entire program.

Johnson points out why insurers nearly tripled their holdings in CLOs from 2012 to 2016.

“There are a couple of things that caused that rise,” said Johnson. “There are companies that have asset managers, which they either own or have partnered their organizations with. These companies are really self-originating their own deals and then placing a part of those deals into the insurance companies. Additionally, asset managers are heavily marketing this asset class to insurers, which they are selling on two points, basically stronger yields versus alternatives in the market, as well as the fact that these have a very low default rate from a historic standpoint.”

Hopper highlighted how CLOs withstand market volatility and risk.

“They are not completely immune. There is some market risk, but they do have some favorable features,” said Hopper. “CLOs are floating rate instruments. They do provide protection against the rising interest rate environment, which we might be seeing over the next couple of years or so that ultimately reduces interest rate risk on these investments. Second, risk performance in terms of defaults is better than corporate counterparts. This is because the underlying loans are secure, which allows for better recoveries than corporate bonds.”

Both analysts said they believe that investing in CLOs requires extensive research and knowledge.

To access a copy of this special report, titled, “Collateralized Loan Obligations Momentum Continues With Insurers,” visit http://www3.ambest.com/bestweek/purchase.asp?record_code=271780.

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