Continued low interest rates and bond yields are presenting significant challenges for insurers. Here to discuss insurance investment options is Michael Haylon, a managing director at Conning.

Low interest rates and bond yields have created major challenges for many insurance companies, says Mr. Haylon. “Many companies built increases in bond yields into their forecasts and it just hasn’t happened…the kinds of instruments insurance companies typically invest in, like corporate bonds and mortgage-backed securities have seen yields drop much more dramatically than treasuries.”

Portfolio yields are continuing to decline and are now at record lows according to Mr. Haylon and this will continue to put more pressure on insurers’ bottom lines. In recent years, companies that have taken on the most interest rate and credit risk have been the ones that experienced strong investment returns. “High yield below investment grade bonds have dramatically outperformed investment grade bonds…since 2009,” says Mr. Haylon. He cautions however, that this investment strategy may not produce the strongest returns over the next several years.

Even though the Federal Reserve is expected to increase interest rates at some point, Mr. Haylon states “…any increase in short term rates…is likely to be relatively measured and rates will likely remain quite low by historical standards.” He also indicates that the current yields on U.S. Treasury bonds are appealing compared to bond yields from Europe, which has seen yields drop because of quantitative easing.

There are a number of investment opportunities that offer strong returns, says Mr. Haylon. Emerging markets is one area that offers great opportunity and less than 1% of invested assets by U.S. insurance companies are invested in emerging markets. Another area Mr. Haylon noted is Master Limited Partnerships (MLPs), which offer solid distribution yields “particularly for the midstream space, storage, distribution and processing MLPs which typically earn fees that are locked in under long-term contracts.”

A major concern of Mr. Haylon is that insurers’ portfolios should not become too concentrated in lower-rated corporate bonds. In a portfolio context, he says it is important for insurers to diversity by investing in different parts of the world and in different sectors and asset classes to enhance risk adjusted returns and portfolio diversification.

For more on investment strategies visit the Conning website. If you missed any of our previous CONNecting with Conning programs visit the WRIN.tv On Demand Library.

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