More insurance companies are looking with interest at loans as an investment class and chipping in to commingled funds. Bankers and fund managers have long been pitching to insurers the virtues of loans' senior status and floating-rate component, and some of the biggest and earliest institutional players in the market were insurance companies. But increasingly, smaller insurers are jumping in, an investment consultant to insurance companies told Insurance Finance & Investment, an LMW sister publication. He noted the product had previously suffered a lack of awareness among smaller insurers, but it was now stepping out into the light.
By investing in a commingled-pooled fund, small- to mid-size insurers are able to allocate as little as $1-5 million to high-yield bank loans, he said. The collective asset pool is then exposed to many different leveraged bank loans, whereas a stand-alone $5 million allocation would afford exposure to a limited number of issues, the consultant explained.
Tom Swank, cio at Security Benefit Life, said his company currently allocates 4% of its $3 billion general account to high-yield bank loans and dedicates 50% of the slug to a commingled high-yield bank loan fund. Swank declined to name the fund's manager but said the insurer is considering increasing its exposure to both the fund and collateralized loan obligations. "If you have a view that the economy is slowing down, this is an asset class that you stock up on," he said, noting loans' high placement in an issuer's capital structure. Because defaults increased last year and Security Benefit expects further downgrades and defaults this year, it prefers to increase the leveraged bank loan allocation over its $190 million junk bond mandate, said Swank.
Rich Jakob, portfolio manager and director of product development at Dallas-based Highland Capital Management, LP, which manages pooled high-yield bank loan funds, said current risk adjusted returns make leveraged loans an attractive asset class for insurers relative to other traditional fixed-income asset classes. He said there is increased interest from insurance companies that have exposure to high-yield bonds and are looking to reduce volatility as well as diversify. "If they've had high-yield exposure, they're looking at loans to mute volatility," Jakob said. Additionally, the loans float with LIBOR, so they're appealing to insurers with a variety of portfolio duration requirements, he said. Jakob said spreads on these loans are north of LIBOR plus 300. Highland Capital's funds have exposure to 80-100 high-yield bank loans, and funds generally top out at roughly $1 billion, though limited partners may be added, he said.