OLDWICK, N.J.--(BUSINESS WIRE)--Insurers have substantially increased their investment in collateralized loan obligations (CLO), with holdings nearly tripling to $57.6 billion in 2016 from $19.4 billion in 2012, according to a new A.M. Best report.
The Best’s Special Report, “Collateralized Loan Obligations Momentum Continues With Insurers,” notes that CLOs have a history of strong credit performance and many investor-friendly structural features and protections. The report also states that the overall asset-backed securities (ABS) market has been growing by an average 2.6% over each of the last five years, based on securities outstanding, and collateralized debt obligations (CDO), of which CLOs are a subset, have consistently accounted for 47% to 54% of outstanding ABS’ since 2007. CLOs as a subset of CDOs have increased to 75% in 2017 from 23% in 2006, as investors have gravitated toward CLOs as a way to achieve higher returns with a minimal increase in risk. These securities performed much better than CDOs and other ABS’ throughout the recent financial crisis, as even the lower debt tranches escaped largely without losses. Given persistently low interest rates, CLOs have offered an attractive yield alternative to other more traditional asset types, such as corporate bonds. Below investment grade holdings have experienced more volatility, but 97% of CLOs held by insurers were investment grade as of 2016. However, spread tightening, refinancings and reduced collateral have somewhat damped investor appetite, as well.
In terms of total dollars, the life/annuity segment has driven the insurance industry increase in CLOs since 2012 and currently accounts for more than 80% of the industry’s holdings. Nevertheless, the health and property/casualty segments have posted larger growth rates since 2012, owing to their low starting point, reporting large increases in 2013 and 2014. In aggregate at year-end 2016, CLOs constituted roughly 1.6% of life/annuity bond portfolios and roughly 1% of property/casualty and health allocations.
A.M. Best views allocations to CLOs as it would many other traditional asset classes. A.M. Best expects companies to be able to discuss these investments in detail, including strategic use, performance and liquidity issues. Investing in CLOs is not without risk, and the importance of understanding a CLO’s structural characteristics cannot be underestimated, as the performance of two CLOs with the identical collateral assets may differ owing to structural differences. Companies should be able to explain risks they choose to avoid or keep and how these risks fit in their overall operating strategies and enterprise risk management framework.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=271780.
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