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NEAM CEO says 5% to 6% IG yields support insurer ROE targets

With spreads at 70 to 90 basis points, the NEAM CEO argues security selection and curve management matter more than market beta.

5%to 6% IG yields support insurer ROE targets

At a glance

  1. Rotatori put recent investment-grade corporate spreads at roughly 70 to 90 basis points, near the tight end of historical ranges.
  2. For allocators evaluating NEAM, a 5% to 6% high-quality yield can improve earnings visibility for a general account and ease pressure to buy lower-rated credit or extend duration, according to Rotatori.
  3. NEAM's chief investment officer expects a quarter-point Fed hike in December, as Private Wealth Daily previously reported.

Investment-grade bond yields of about 5% to 6% can support insurers' return-on-equity targets without adding credit risk or duration, New England Asset Management CEO William E. Rotatori wrote in a Nov. 10 commentary in Insurance AUM Journal.

Rotatori put recent investment-grade corporate spreads at roughly 70 to 90 basis points, near the tight end of historical ranges. He said a larger share of expected return now comes from Treasury yields than from spreads. Results will depend more on security selection, yield-curve management and downside risk control than on broad market beta.

For allocators evaluating NEAM, a 5% to 6% high-quality yield can improve earnings visibility for a general account and ease pressure to buy lower-rated credit or extend duration, according to Rotatori. NEAM reported $111.7 billion in regulatory assets across 1,001 accounts in its Form ADV filed March 31 with the SEC.

NEAM's chief investment officer expects a quarter-point Fed hike in December, as Private Wealth Daily previously reported. Rotatori's caution is about valuation. Tight spreads leave a small margin of safety. He wrote that a downgrade, an earnings disappointment, industry disruption or a weakening balance sheet can quickly overwhelm the extra income from taking more credit risk.

Reported by the Insurer portfolios desk from Insurance AUM Journal and Form ADV (SEC IAPD). Published . Corrections

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NEAM CEO says 5% to 6% IG yields support insurer ROE targets