From a historic performance perspective, Senior Secured Loans (SSLs) have recorded positive returns in the vast majority of years, and an attractive protection potential against impairments. This paper takes a closer look at SSLs and considers how the asset class may help insurers to meet their objectives.
Many of the most commonly used fixed-income investments, such as high-quality government bonds, now generate low to negative real returns. Consequently, insurers are looking beyond traditional asset classes, be that investing in illiquid forms of private credit, diversifying exposures globally or moving down the credit spectrum in order to find more attractive risk-adjusted opportunities.
One asset class that has seen growing interest from insurers is Senior Secured Loans (SSLs). SSLs are floating rate, sub-investment grade rated, USD/EUR-denominated loans to corporates. They sit senior in the capital structure and are secured on assets, hence loss on default should be lower than on comparable, unsecured investments.
Combined with the higher spreads currently on offer, this results in potentially higher risk-adjusted returns compared with high yield bonds.
Given that there is no difference in the capital treatment under the Solvency II Standard Formula (for an equivalent rating and duration), it also means the potential for a higher return on capital for the insurer.
From a historic performance perspective, SSLs have recorded positive returns in the vast majority of years, and annual volatility has been relatively low. They have exhibited a moderate (post crisis) correlation to investment grade corporate bonds, and at the same time correlations to government bonds have been close to zero – this may provide insurers with potential diversification benefits.
This senior loans paper takes a closer look at SSLs and considers how the asset class may fit within an insurance company’s investment strategy.
In the context of the complex insurance regulatory environment, Elizabeth Gillam, Head of EU Government Relations and Public Policy at Invesco, gives her insight on the crucial topics impacting insurance companies.
In our first issue of Insurance Investment Management Insights, our experts offer their insights on the crucial topics which are likely to impact insurance companies.
European investors continue to face low yields in the investment grade universe and are looking for additional sources of return and diversification. A rising number of European insurers consider infrastructure debt to be an attractive option. But the investment opportunities in Europe are rare.
