#211 | The Emerging Credit Event

Although most of the attention in the media has focused on the impact of the response to COVID-19 on equities, the proper functioning and pricing of credit is far more important for life insurers. The last two weeks have seen a reversal of the credit markets that has unfolded with unprecedented speed and severity, opening up new windows of opportunity for insurers with dry powder, as long as they’re willing and able to stomach the risk.

But more than anything else, the recent reversal in the credit market highlights the power of cash value in life insurance as an alternative to traditional fixed income assets – with some not-so-obvious tradeoffs.

This post was recorded on 3/24 and published on 3/25. Since then, the credit markets have reverted back to a somewhat more normal state as a direct result of the Fed announcing “unlimited” asset purchases in order to support asset prices. It’s working – at least for high-quality asset prices. The Moody’s Aaa Index yield has dropped all the way to historic lows near 2.35% (as of 4/14), but credit spreads are still high – right now, Moody’s Baa is sitting at 4.17%, resulting in the highest spread since 2009.