With incredible low interest rates in loans and other asset growing areas, many managers are not seeing a return on investment like they were even five years ago, much less before the 2008 financial crisis. However, insurance companies have started to take on these loans and combined them into so called Collateralized Loan Obligations. (CLOs)
CLOs are groups of loans that are backed by collectivized debt by equity brokers. They are collected and put into packages that have different rates of risks and returns. The risks are based on certain ratings by banks and insurance companies. These businesses take these loans and sit on them allowing them to gather interest and they profit. Insurance companies have amassed a CLO Bonds totaling $158 Billion in 2019 alone, almost double what they had four years ago.
Some loans being riskier than others would pay out more. However, if they default on these loans, the companies risking it also end up losing out because they went into debt to back these loans. Too many of these defaults, and the company could go bankrupt. It was these CLO’s that lead to the recession crisis among other factors. With the COVID crisis taking hold and default rates increasing, some of these companies could face debts they could not recover from. While the so called Triple A rated bonds aren’t as risky, if these companies that guarantee these loans can’t back them, they’re in serious trouble of being liquidated.[1]
CLO’s are a risk reward system that can easily make some serious returns or destroy your business. While the obligations aren’t as serious as the 2008 crisis, it’s still something to watch as the industry prepares to be hit by COVID related claims.
[1] https://www.insurancebusinessmag.com/us/business-news/how-a-158-billion-bet-is-putting-the-us-insurance-industry-at-risk-229604.aspx?utm_source=GA&utm_medium=20200803&utm_campaign=Newsletter-20200803&utm_content=7B53D7BF-7D4C-4061-BE95-8E60EB5DCB7D&tu=7B53D7BF-7D4C-4061-BE95-8E60EB5DCB7D