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Insurers taking steps to prepare for higher interest rates

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More than 8 insurers are shortening the duration of their general account investment portfolios to prepare for rising interest rates, according to new research.

Cerulli Associates discloses this finding in a new June 2014 report of “The Cerulli Edge-U.S. Monthly Product Trends.” The monthly publication helps investors track product rankings, assets, flows, developments and trends from a third-party distribution perspective.

The report reveals that 83 percent of insurers intend to shorten portfolio durations in anticipation of rising interest rates this year. Sold majorities of the companies also plan to move from benchmark-oriented strategies to unconstrained or absolute return strategies (67 percent) or increased credit exposure (56 percent). Just over one in ten of the insurers surveyed (11 percent) indicate that they intend to increase capital reserves.

“Cerulli believes investors will continue to prepare portfolios for the inevitability of higher [interest] rates, as well as search for needed yield via so-called plus sectors of high-yield corporate bonds, bank loans/leveraged loans (floating rate debt) and emerging market debt,” the report states. “Despite what many see as extended valuations in these plus sectors, default rates are relatively low, are less duration sensitive and still offer income advantages over investment-grade corporate and government debt.

“This bodes well for asset managers overseeing or preparing strategies in absolute return or unconstrained fixed income,” the report adds. “In addition to different types of alternative fixed-income strategies, many of the larger fixed-income managers are offering fixed-income strategies that behave like a liquid alternative investment (i.e., those with low correlation of returns to traditional bond markets), but don’t come in a traditional hedge fund structure with hedge fund lock-up periods and higher fees.”