Innovation in corporate and asset-backed finance is hardly a new concept. In the 1990s, the future music-catalog royalties of musician David Bowie were converted into asset-backed securities. In the late 2000s, securitizations backed by loans to time-share residents emerged.
More recently, securities have been backed by revenues from leased space in data centers or oil-and-gas operations. The market continues evolving and innovating with new security structures and collateral, as more companies and banks view securitized and private markets as efficient ways to raise capital and right-size balance sheets.
For insurance investors today, the range of opportunities in collateral is broad and diverse: corporations, homes and offices, consumer goods and services, hard assets and financial assets. So are the access points: public and private securities, whole loans, warehouse lending and securitizations.
New Opportunities Often Have “Expiration Dates”
That’s a fertile hunting ground for investment opportunities, but it can also be a challenge for investors to keep their arms around it. That’s especially true with new innovations hitting the market daily and with valuations constantly shifting. Such a complex landscape could strain a more rigid approach focused on “known” asset classes or sectors.
There’s a case to be made that early adopters of new asset types have been able to access higher yields and spreads (Display). Newer sectors have tended to trade at wider spreads before subsequent investors bring more capital to bear on the opportunity. If investors can’t pivot quickly enough, this could end up being a missed opportunity.
Even beyond emerging sectors, spread levels vary widely, with the gap among private asset-backed securities particularly broad (Display). On average, insurance investors have the potential to add about 150 basis points of yield over public corporate bonds, but spreads could be as low as 120 basis points or as high as 190 basis points or more, depending on the specific security. That puts a premium on accurately—and quickly—assessing relative value.
Different Fundamentals, Different Skills Required
Assessing the macroeconomic and fundamental factors that affect opportunities and risks in a highly diverse investment universe requires multidimensional abilities. Aviation leasing and timeshare asset-backed securitizations, for instance, both fall under the private credit spectrum, but the underlying drivers are very different.
Success in aviation leasing requires a deep understanding of aviation market dynamics, the valuation of different aircraft models and vintages, technical aspects of aircraft maintenance, and how global economic conditions influence airlines’ profitability and the volume of air travel demand.
On the other hand, analyzing timeshare asset-backed securitizations requires a seasoned eye to interpret the dynamics of real estate and hospitality markets; how factors such as location, amenities, and market trends affect property valuations;, and the legal framework that governs timeshare sales.
One Size Doesn’t Fit All for Insurance Investors
For insurers tapping into private credit markets, some segments of the market may be more aligned with their specific needs than others when it comes to liabilities and investment guidelines.
For those seeking long-term assets to match long-term liabilities, investment in renewable energy infrastructure may provide a clever way to tackle that challenge, with financing increasingly coming from private lenders. Many of these investments have longer maturities in the 20-year range, and, though the spreads are modest, they may be appealing in a maturity range that offers fewer options in spread assets. Insurers with shorter-duration liabilities, on the other hand, must consider the trade-off between return potential and diversification.
From a regulatory standpoint, some infrastructure investment—particularly in Europe—may warrant reduced capital requirements. Regulatory regimes dictate certain requirements for insurance investors, too. Some assets, such as home improvement loans, are actually consumer loans and not admittable assets as per the National Association of Insurance Commissioners. To check the rules box, insurers must access these assets through a specific structure.
The bottom line: insurance investors need tailored treatment, not off-the-rack investments.
Casting a Holistic Net Around an Expansive Field of Opportunities
Given the expansive opportunity set across private credit markets, it’s no surprise that insurance investors have been pouring in sizable amounts of capital.
A traditional approach to accessing these opportunities involves allocating to distinct market segments. Governance committees assemble a stable of managers covering specific segments and then manage the overall mix. Periodically, they revisit the composition, review manager track records, assess overlapping risks, adjust exposures and consider adding emerging segments. For insurers willing to invest the time and expense, this may be a useful approach.
But we see another way—one holistic allocation embracing all segments of public and private markets. Sourcing and origination, research, credit underwriting and due diligence pare down the broad universe to an investable one, which is then assessed for relative value through an insurance lens in real time, evaluated for alignment with guidelines and then managed at the individual deal and portfolio levels.
While this avenue does require a diverse skill set and capabilities, we think it’s a promising way to tackle an investment problem that has a lot of moving parts. Opportunities come in different shapes and sizes and the playing field evolves quickly, requiring a certain degree of nimbleness for insurers to capture opportunities early and effectively while looking at risks holistically across wide-ranging sectors.
The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.
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