Structured products can be essential components of well-diversified fixed income portfolios for insurance companies. As with all of our fixed income investment strategies, our structured products investment process relies heavily on specific security selection to identify opportunities that demonstrate cash flow stability and attractive return potential while avoiding the potential for credit impairments.
Recent market conditions have shown that there is no replacement for fundamental security analysis. Credit ratings and other standard risk measures have proved to be poor predictors of credit performance. Our structured products team evaluates each investment opportunity independently of its credit rating. Prior to purchase, we employ a three-step process in which we evaluate the issuer and servicer of a security, the underlying collateral and the various risk characteristics of the collateral and the transaction structure. This allows us to determine how cash flows, loss potential and structural protections embedded in the security might affect the portfolio. Combining our bottom-up analysis with an assessment of relative value across the fixed income universe leads to a purchase decision.
Once securities have been purchased, we begin what is perhaps the most important part of our investment process: the ongoing monitoring of credit and investment performance. We perform detailed security surveillance monthly, and use it to decide which securities to continue to hold in portfolios. The monitoring function includes both reviewing important credit metrics and modeling security credit performance — not only to identify securities for sale, but also to assist our clients with the preparation of their accounting records and supporting their impairment discussions with auditors as appropriate.
Because of their relatively high yields, stability and high total returns, structured products are appropriate for nearly any kind of insurance portfolio, including Property & Casualty, Life, Health and Captive.