Issues & Answers: Staying the Course

Why It Matters

The analysis shows insurers can boost yields while protecting regulatory capital by adjusting sector exposure and rigorously stress‑testing credit, a critical advantage as volatility and private‑credit risks intensify.

Key Takeaways

• Corporate balance sheets stay healthy despite heightened market volatility.
• Mid‑to‑late cycle focus shifts to downside protection, not spread chasing.
• AAM underweights long‑duration corporates, favors municipal and structured credit.
• Energy shock’s speed and source demand granular issuer‑level analysis.
• Private‑credit stress may trigger downgrades, prompting capital reallocation.

Summary

In a recent AM Best Audio interview, AAM’s senior analyst Elizabeth Henderson outlined how insurers can stay resilient amid rising market volatility, shifting credit conditions and new risk sources.

Henderson emphasized that despite heightened volatility, corporate fundamentals remain solid – defaults are low, leverage stable and most companies fund capital spending internally. She described the current environment as a mid‑to‑late cycle, where the priority moves from chasing spread to protecting against downside risk, with stress‑testing of issuers to safeguard both returns and NEIC‑based capital ratios.

AAM’s portfolio stance reflects that view: underweight long‑duration corporate bonds, overweight taxable municipal bonds and structured credit such as asset‑backed securities, and avoid inflation‑sensitive sectors. The team also highlighted the unique nature of the recent energy shock, noting that rapid price spikes require issuer‑level analysis, and warned that expanding private‑credit exposure could trigger downgrades and force capital back into public markets.

For insurers, the takeaway is to pursue disciplined credit selection, use active research‑trading collaboration to capture yield without sacrificing quality, and model scenarios across rising rates and volatility. Maintaining capital flexibility while exploiting dislocations in high‑quality sectors can enhance long‑term portfolio performance under the evolving regulatory and market landscape.

Original Description

Elizabeth Henderson, head of fixed income; Principal and director of corporate credit at AAM said that the integration between research and trading allows the company to pair strong credit conviction with efficient execution.