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Please note: AI generated transcript.
Text on screen:Enhancing buy and maintain for insurers. Claire Bews, Integrated Solutions Credit Portfolio Manager

The rise in yields experienced by insurance investors in recent years means that contractual assets offer the potential for higher returns. However, insurers in some jurisdictions face a large discrepancy between the supply of buy and maintain suitable corporate bonds and the scale of potential demand. 

In our view, buy and maintain clients now have an opportunity to enhance their strategic credit portfolios by incorporating other fixed income assets alongside their core holdings of investment grade credit. 

Insights. Enhanced buy and maintain strategy aims to optimize clients' specific risk return needs by utilizing a broader opportunity set than traditional buy and maintain strategies. 

By broadening the strategies investible universe beyond its core investment grade credit allocation, we believe it can help to either enhance yield and maintain credit quality or enhance credit quality and maintain yield. 

So which asset classes can we use? Well, first of all, we can add liquid investment grade credit assets such as asset backed securities and US municipal bonds, and by doing so, could potentially enhance their risk return profile. 

For example, allocating to asset-backed securities may allow insurers to enhance yields at shorter maturities while improving credit quality. As the chart on the screen shows adding global A BS could have allowed insurers to exploit a spread uplift of around 150 basis points versus UK corporate bonds. 

Allocating to US municipal bonds can help alleviate the limited availability of buy and maintain suitable investment grade debt, particularly at longer maturities. 

For those clients willing to sacrifice some liquidity to obtain a higher yield advantage, we recommend allocating a portion of assets to illiquid credit. For example, secured finance and private corporate credit.

Both asset classes may allow buy and maintain investors to obtain exposure to asset classes that have exhibited a consistent yield advantage over similarly rated UK corporate bonds. 

Finally, we believe the higher rated parts of the high yield universe can also be used to enhance buy and maintain returns. Specifically, we prefer short dated issues that mature within a predictable window of an issuer's cash flow and earnings generation.

Short dated high yield bonds can allow insurers to target higher yields without significantly increased capital requirements. 

The table on the screen provides an illustrative example of how allocating to each of our preferred enhancing asset classes Could affect a model portfolio. 

Moving from left to right, we can see that potential yields and spreads increase as we owe to the asset mix of a portfolio by adding exposure to a BS Munis high yield and I liquid assets whilst often improving the overall credit quality of the portfolio.

Overall, we believe enhancing buy and maintain portfolios by allocating to other credit asset classes can help to improve spreads rating profiles or both, while also providing additional liquidity options in times of stress. 

Please note: AI generated transcript.
Text on screen: An introduction to ABS. Andy Burgess, Fixed Income Investment Specialist 

Asset backed securities, more commonly known as ABS, differ meaningfully from the more widely used corporate bonds.

Each security is essentially providing financing for a pool of loans that are either secured against a physical asset or a designated set of cash flows.

Such collateral pools will vary from bond to bond. They might be financing lending for residential mortgages, car loans, commercial mortgages, or even corporate loans. Indeed, your own mortgage might be being financed in the ABS market and you wouldn't know it.

An important feature of ABS is that from an investor's perspective, the credit risk comes from the underlying borrower rather than the originator of the loan.

ABS therefore provides a diversifying source of investment risk from equities or corporate bonds that are ultimately backed by single company.

A second characteristic is a return linked to short-term cash rates. This means that ABS are less vulnerable to increases in long-term government bond yields, but instead will provide a return over and above cash rates over the medium term.

ABS are also relatively short dated with a typical maturity of only two to three years. This is about half that of corporate bonds. Maybe ABS investments typically less volatile than their corporate bond peers.

The asset class is, however more complex to analyze than corporate bonds. Instead of analyzing the balance sheet of a single company, ABS investors analyze the credit profile of a collateral pool backed by hundreds or even thousands of underlying loans. So investors need specialist expertise to analyze these risks properly.

There are three main groups of collateral backing asset-backed securities. These are residential and consumer, commercial real estate or corporate type risks.

The credit quality of ABS deals can vary, but it is generally better than the corporate bond market with the highest quality AAA segment of the market being the largest part of the ABS market.

A credit rating above that of the UK government potential returns for similarly rated exposures are attractive. The additional return over and above short-term cash rates compares favorably with that from similarly rated corporate bonds.

Investors are paid extra for the complexity of the analysis required to understand the credit risk of an ABS deal, rather than for taking on more credit risk.

ABS can therefore offer a diversifying source of attractive returns from other bond assets, but without the vulnerability from sharp rises in long-term interest rates.

Please contact us if you'd like to learn more about the opportunities this asset class can provide.