Barings: insurers should home in on GI CLOs

Alternative asset manager Barings says insurers should consider the role investment grade (IG) collateralised loan obligations (CLOs) can play in their portfolios, whether through a new allocation or as part of an ongoing asset allocation review. In a research note, the authors argue that IG CLOs can serve as a flexible and increasingly important component of the insurance investment universe, provided they are properly structured and managed.

Ruolin Wang, director of insurance solutions, and Bo Trant, client portfolio manager for global CLOs at Barings, write that developments on both the supply and demand sides of the asset class make this an opportune time for insurers to assess where IG CLOs can improve portfolio outcomes. They note insurers should also consider how to implement the asset within their accounting, capital, liquidity, hedging and governance frameworks.

Recent regulatory changes in Europe and the US are set to make senior IG CLO tranches more capital efficient for insurers. The CLO market is also attracting a broader range of investors beyond traditional institutions such as banks, pension funds and insurers. Barings adds that secondary market liquidity in IG CLO tranches has improved materially in recent years, making the asset class increasingly accessible as part of core public fixed income allocations.

According to Barings, IG CLO tranches offer a spread premium relative to IG corporates, regulatory capital efficiency, strong liquidity and potential diversification benefits when allocated alongside traditional IG corporates. The firm also points to the asset class's safety profile: CLOs issued from 2010 onwards have generally featured higher levels of credit enhancement, tighter collateral eligibility criteria and more robust structural protections following the Global Financial Crisis.