Time to Get Strategic: Emerging Markets Debt as a Core Insurance Portfolio Allocation

Emerging markets debt (EMD) comes up regularly in our discussions with insurance clients of all types and geographies.

Given persistently low yields on traditional sources of insurance portfolio income, it is not surprising that insurers would look to expand their opportunity set to include asset classes in which they can deploy their capital more efficiently and effectively. It also is not surprising that EMD in particular would be of interest to insurers considering the asset class's robust performance of late and the general maturation in emerging market economies and their debt markets over the past decade.

While there appears to be widespread recognition of the benefits of EMD investing among insurers, there is little evidence in their behavior to suggest that they treat the asset class as anything more than a tactical source of yield. As we discuss in this paper, it's clear to us that EMD should represent a strategic allocation for most insurers.

Executive Summary

  • Based on our analysis, we believe Insurers are generally under-allocated to EMD relative to a typical institutional portfolio, which means they are not capturing the full opportunity this asset class can offer.
  • Current insurer allocations tend to be heavily concentrated by region, country, industry and issuer—an inefficient and risky way to manage exposure to this asset class.
  • While the appropriate exposure will depend on an insurer’s specific circumstances, we believe emerging market debt deserves a core strategic allocation for most insurance portfolios.
  • Emerging economies and their debt markets have evolved significantly over the past decade. Today’s EMD universe offers insurers access to a variety of higher-yielding debt with attractive risk/return profiles and diversification benefits without compromising their risk objectives or regulatory constraints.
  • For insurers that lack the resources necessary to manage an allocation to the large and diverse EMD universe, partnering with a dedicated and well-resourced EMD platform may allow access to the benefits of the asset class through portfolios that can be customized to the insurer’s unique objectives and constraints.

Our research shows that insurers in general appear to be underweight EMD, and those who do maintain exposures are highly concentrated in certain regions, countries, industries and issuers, implying a more tactical approach to sourcing yield.

Percentage of Insurance Companies that have EMD Exposure

As of December 31, 2017

Source: SNL Financial, J.P. Morgan, FactSet, Bloomberg.
Note: 0.1% is used as cutoff, i.e. companies with an EMD allocation greater or equal to 0.1% are counted as "Has EMD," and companies with an EMD allocation less than 0.1% are treated as "No EMD."

While the appropriate allocation will depend on an insurer's specific circumstances, it's clear to us that EMD should represent a strategic allocation for most portfolios. Emerging debt markets have evolved in the years following the financial crisis, and the securities that today comprise EMD --corporates and sovereigns, in hard and local currencies, with issues across the ratings spectrum and of various maturities --offer insurers unique risk/return profiles and diversification benefits along with generally higher yields than can be found in traditional insurance portfolio investments. Given their limited historical exposure to EMD, many insurers may lack the in-house expertise to manage an EMD portfolio. We suggest partnering with a dedicated and well-resourced EMD platform that understands the intricacies of insurance portfolio management offers access to this asset class with portfolios that can be customized to address each insurer's unique objectives and constraints.

Using analysis developed by Neuberger Berman's Insurance Solutions Group, this paper provides background on the evolution of emerging market economies and the debt markets, an examination of the insurance industry's current allocation to EMD and a discussion of the impact this burgeoning asset class can have on insurance company portfolios.

EMD Offers a Compelling Risk/Return Profile

January 1, 2003, through December 31, 2017

Source: J.P. Morgan. JPM EMBI Global Diversified (EMD Hard Currency), JPM CEMBI Diversified (EMD Corporate), JPM GBI-EM Global Diversified (EMD Local Currency), JPM EMBI Global Diversified 1-3yr and JPM CEMBI Diversified 1-3yr (EMD Short Duration), EMD Blend (25 EMD HC/25 EMD Corp/50 EMD LC), Barclays U.S. Agg Corporate Index (U.S. IG Corporates), Credit Suisse Leveraged Loan (Leveraged Loan CS), Barclays Global Agg Total Return Index Unhedged (Global Agg (unhdgd)), Barclays Euro Agg Corporate Total Return Index (Euro Corporate), Unhedged Barclays U.S. Corporate HY (U.S. HY Corp) and United States Benchmark 10 Year Datastream Government Index (U.S. Treasury).

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. It is impossible to predict with certainty the ultimate success or profitability of any socially responsible investing program; such programs are necessarily subject to a range of complex, sometimes shifting factors, such as prevailing market conditions, regulatory requirements, political and legislative developments and other conditions. Unexpected or unforeseen developments in climate change could also adversely impact an SRI program, while the application of ESG criteria could compel a decision to overlook a company that ultimately outperforms or invest in a company that ultimately underperforms. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments; investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Representative portfolio information (characteristics, holdings, weightings, etc.) is subject to change without notice. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Past performance is no guarantee of future results.

This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Neuberger Berman is not providing this material in a fiduciary capacity and has a financial interest in the sale of its products and services. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. This material may not be used for any investment decision in respect of any U.S. private sector retirement account unless the recipient is a fiduciary that is a U.S. registered investment adviser, a U.S. registered broker-dealer, a bank regulated by the United States or any State, an insurance company licensed by more than one State to manage the assets of employee benefit plans subject to ERISA (and together with plans subject to Section 4975 of the Internal Revenue Code, “Plans”), or, if subject to Title I of ERISA, a fiduciary with at least $50 million of client assets under management and control, and in all cases financially sophisticated, capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. This means that “retail” retirement investors are expected to engage the services of an advisor in evaluating this material for any investment decision. If your understanding is different, we ask that you inform us immediately.

Neuberger Berman Investment Advisers LLC is a Registered Investment Adviser.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

© 2018 Neuberger Berman Group LLC. All rights reserved.