“Continuing low interest rates and soft economic growth are contributing to a tough investment climate for insurance companies, but they’re still finding opportunities for a decent return if they’re willing to broaden their search,” according to industry executives at Standard & Poor’s Ratings Services’ 30th Annual Insurance Conference, held June 4-5, 2014.
“It’s an extremely difficult time right now to find value,” said John C. Mason, senior VP and CIO at OneAmerica Cos., explaining it is “hard to find a high-impact asset class that hasn’t been discovered.”
David Braun, executive VP and portfolio manager at Pacific Investment Management Co., said that insurers “need to be more receptive to looking globally, and willing to go elsewhere where there’s juicier spreads.”
Braun explained that, despite a “negative stigma,” insurers should consider revisiting non-agency residential mortgage-backed securities, which “now offer attractive spreads.” That is, if you’re “able to stomach the mark-to-market volatility.”
Tim Corbett, Executive VP and CIO at Massachusetts Mutual Life Insurance Co., also described the current situation as being a “tough market to invest in,” but also said “there are opportunities out there,” noting that emerging market debt is an area worthy of investigation.
The 10-year U.S. Treasuries yield roughly 2.58 percent. A conference-attendee survey revealed that some 59 percent believe 2014 will finish at a yield between 2.5 and 3.0 percent. According to Bloomberg, dollar-denominated government and corporate bonds from developing countries yielded 2.84 percentage points more than Treasuries with similar maturities.
S&P said: “Undoubtedly the continuing low interest rates have eaten into insurers’ profits. The Federal Reserve is suppressing its benchmark rate to boost a soft economy while the European Central Bank, wary of deflation, announced plans this week to cut rates.”
Panelists agreed that interest rates will remain low for a while, and are concerned if that worsens. “Clearly if they go lower, we’ll have other problems to deal with,” said Mr. Corbett. He further noted that he subscribes to the “secular stagnation” theory that there’s lower trend economic growth and inflation.
Braun discussed his views on the “new neutral rate,” which he explained is the “inflation-adjusted federal funds rate in which the Fed doesn’t ease or tighten. Where that rate ultimately winds up will have meaningful ramifications as to where the 10-year Treasury can go during the next three to five years.”
Pimco predicts it range-bound at 2.5 percent-4.0 percent. That backdrop is a key point, he noted, as to why he’s comfortable taking risk and investing in certain spread markets–yields and spreads aren’t what they used to be, “but if you properly recalibrate your expectations, you’ll find that things aren’t as rich as they may seem.”
Mason also noted that the investment community is “underwhelmed” by current economic growth trends and needs a boost in inflation and credit growth. “There are still a lot of structural issues domestically and internationally that haven’t been addressed that will keep growth from accelerating rapidly, in my view.”
Corbett believes, too, that we are in a “secular bull market for equities,” noting, however, that “five years into a bull market and more than 18 months without a significant correction,” makes it feel as though “we’ll see a significant stock market correction.”
Source: Standard & Poor’s Ratings Services