Pimco Tells Insurers to Go Global for Juicy Returns

David Braun, a portfolio manager at Pacific Investment Management Co., said insurers need to invest in bonds outside the U.S. to improve returns.

“Folks need to be more receptive to going global,” Braun said today at an insurance conference held by Standard & Poor’s in New York. Some emerging markets and European companies have debt that offers “juicy spreads,” he said.

More than half a decade of low interest rates has pressured the profits that life insurers earn from investing policyholder funds in bonds. The Federal Reserve is holding its benchmark rate at a record low to stimulate the U.S. economy, and the European Central Bank today unveiled measures including rate cuts to fend off deflation.

Ten-year U.S. Treasuries yield about 2.58 percent, while Italian government debt with a similar maturity pays 2.94 percent. Dollar-denominated government and corporate bonds from developing countries yielded 2.84 percentage points more than Treasuries with similar maturities, the Bloomberg Emerging Market Composite Bond Index (BEM) shows. The index has an average rating of BBB-, the lowest investment-grade level.

Bill Gross, chief investment officer of Pimco, wrote in his monthly commentary that the “new neutral” rate -- the inflation-adjusted federal funds rate that isn’t too restrictive or too stimulative for economic growth -- will be “frigidly low” for an extended period. Pimco is among money managers that handle funds for insurers seeking specialized expertise amid low interest rates and increased regulation.

Private Placements

Tim Corbett, chief investment officer of Massachusetts Mutual Life Insurance Co., said at the conference that emerging-market corporate bonds and government debt from developing nations can provide opportunities to increase yields. MassMutual’s investment portfolio stood at $126.5 billion on Dec. 31, according to its annual report.

The policyholder-owned company has an AA+ credit rating at S&P, the second-highest of 10 investment grade scores. Corbett said the Springfield, Massachusetts-based insurer has the capacity to increase bets on illiquid holdings such as private placements and commercial mortgages.

Braun said that while the illiquidity premium has dropped, it still makes sense for insurers to take advantage of the higher yields.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net Steven Crabill

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