Bridge over ocean
1 March 1997 Financial Analysts Journal Volume 53, Issue 2

Senior Secured Floating-Rate Bank Loans for Life Insurance Company Investment Portfolios

  1. Mark L. Gold
  2. Chad A. Leat
  3. Michel Perrin

The historical perception by life insurance companies has been that spreads obtained in the senior secured loan market have tended to be insufficient on a credit spread basis to justify the investment. An analysis based solely on credit spreads, however, would be insufficient. The return impact on a portfolio with respect to the inclusion of senior secured loans must include an analysis of credit risk in the context of change in interest rates, which may more than offset yield shortfall. An asset/liability efficient frontier technique is used to compare the return and risk characteristics of fixed-income investment strategies with a blend of senior secured bank loans and fixed-income investments. Cash flows were projected across stochastic interest rate scenarios, and a generic single-premium deferred annuity product was modeled as the liability. The quantitative analysis conforms to intuitive expectations and illustrates that using senior secured loans in an investment portfolio tends to reduce financial risk for life insurance companies.

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