EM corporate bonds offer an opportunity for insurers to increase yield in a challenging market environment.
This has forced many insurers to move down the credit curve and seek out riskier opportunities, such as U.S. high yield, in the search for yield.
Are there any other alternatives which offer incremental yield with relatively low risk and volatility?
We think emerging-market corporate bonds provide one such opportunity.
Low current exposure, limited currency risk (because this asset class is USD-denominated), high creditworthiness, low default rates, significant diversity across a wide range of maturity, rating and sector should all appeal to North American insurers both for asset-liability and diversification purposes.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.