“Our attention is particularly focused on capital adequacy,
which we have flagged as a rating weakness for many of the
global multiline insurers (GMIs) covered in this report,
particularly given the once again tumultuous investment
markets,” said Standard & Poor’s credit analyst Lotfi
Elbarhdadi.”However, our concerns are tempered by our positive views
about their broad geographic spread and asset and liability
diversification,” added Mr. Elbarhdadi.We are also looking at the ability of management teams to
weather stormy markets through efficient enterprise risk
management and adequate management actions. Besides lower equity
prices, widening credit spreads and decreasing interest rates,
which are dampening investment returns, are weighing on
earnings. Plus, they have probably offset the positive impact of
management actions in the past few months to restore capital
strength and operating performance. Falling stock prices for the
GMIs and widening credit spreads in our view are further
constraining their financial flexibility.The substantial exposure of GMIs’ fixed-income portfolios to
sovereign bonds and banks in general makes them vulnerable to
the consequences of a potential turn for the worse. This could
also pressure the ratings, depending on the size of a particular
GMI’s exposure. However, based on our view of their diversified
and strong credit quality investment portfolios, as reflected by
their on average strong credit ratings, we have not carried out
any negative rating action on a GMI on the back of the recent
downgrades of the U.S. and Italy. The ratings have also held up
well after the downgrades of Greece, Ireland, and Portugal.Under our criteria, we believe that relatively deficient
capital adequacy is likely to become an increasing source of
pressure on ratings. Our rating analysis factors in, however,
earning generation abilities and actions that management may
take to preserve capital. These actions include asset and
liability derisking measures, conservative crediting rates for
policyholders, and earning retention policies.We continue to view capital adequacy as a rating weakness to
varying degrees for many of the Europe-based GMIs covered in
this report. Current market conditions have, we believe, largely
erased the improvement in GMIs’ risk-adjusted solvency ratios in
the first half of 2011. These market trends are also likely to
put an even greater drag on GMIs’ efforts to rebuild capital
adequacy through earnings generation, in our opinion.Related Criteria And Research— Refined Methodology And Assumptions For Analyzing Insurer
Capital Adequacy Using The Risk-Based Insurance Capital Model,
June 7, 2010— Interactive Ratings Methodology, April 22, 2009
The mention of bond laddering often makes one think of retirees sitting on the sidelines of the market, buying individual bonds with staggered maturities to goose up their yields, but lately it’s not such a doddering strategy.
With bond yields low, savings account interest rates microscopic and stock volatility scary, younger investors and even college savers are starting to embrace the time-honored laddering strategy. If can work for people who don’t want to lock up all of their money in long-term investments but want more yield than they can typically get in short-term savings vehicles.
Bond laddering also adds an element of predictability to a portfolio, since each bond produces a set amount of income and returns principal at a specific date.
Stan Richelson, a financial advisor in Blue Bell, Pennsylvania, recently constructed a ladder for a couple whose child was starting college in six years. The first of the four investment-grade municipal bonds, which matures freshman year, has a tax-free yield of 1.5 percent. The last, which matures in 2020, yields 2.35 percent. That translates into taxable equivalent yields of 2.24 percent and 3.5 percent, respectively, for investors in the 33 percent federal tax bracket.
“That may not sound like all that much,” he says. “But you’re still getting a decent return and you know the money will be there when you need it.”
Bond ladders have some limitations, though.
But buying individual corporate and municipal bonds usually requires a total investment of at least $50,000 to $100,000 to get adequate diversification and avoid high markups on small transactions, says Kathy Jones, a fixed income strategist with Charles Schwab. Smaller investors can get around that by laddering Treasury securities or certificates of deposit, since investment minimums are so low.
Not everything should be laddered, says Jones. Investors who don’t want to bother selecting individual bonds or CDs may be better off with a low-cost index bond fund, and funds are also preferable for areas of the market that are risky or difficult to access, such as high-yield or emerging market bonds.
Inflation is another issue. A laddered bond portfolio helps investors keep pace with inflation and rising interest rates because when the short-dated bonds come due, the proceeds can be reinvested for longer terms at higher rates. However, because the bonds pay a fixed return they may not increase income as rapidly as a bond fund, which can respond to rising rates more quickly by adding higher-yield bonds to the mix.
But if you’re interested in the laddering technique, here are some ways to make it more effective and safe in a low-rate environment.
Look to corporate or municipal bonds for better yields.
As a group, investment-grade corporate bonds maturing in six to seven years are yielding 2.4 percentage points more than Treasuries with a similar maturity, which are now yielding about 1.4 percent. Even municipal bonds, which usually yield less than Treasuries because of their tax-exempt status, are yielding slightly more because investors are concerned about state and local fiscal problems.
Compared to other investments, though, investment-grade municipal securities are pretty low risk. Last year only $2.8 billion out of nearly $3 trillion in outstanding municipal bonds defaulted, and most of those were among below-investment-grade issuers.
Jeff Layman, chief investment officer at BKD Wealth Advisors in Springfield, Missouri, feels comfortable stretching for better yields at the higher-quality end of the corporate bond market. “Many companies are in good shape and have lots of cash on their balance sheets so paying off the bonds shouldn’t be a problem,” he says.
The key is sticking with investment-grade issuers rated A or higher. “This isn’t the time to buy high-yield trouble and hope it does okay,” says Layman.
Limit maturities.
Low interest rates have prompted Layman to keep the maximum maturity for most bond ladders at about seven years. “In the past we’ve gone out as long as 15 years on maturities, but there’s not enough reward for doing that now,” he says.
Start with a “barbell.”
“With a barbell you cluster the investment at the short and longer ends of the maturity range,” Jones explains. “If interest rates go up, you can use the proceeds from the shorter-term bonds to build out the middle rungs of the ladder.”
An investor starting with an equal combination of Treasury securities maturing in two years or less and another set maturing in around 10 years might earn a current portfolio yield of a little less than one percent.
“That’s not a lot,” she says. “But it’s better than having your money sit around in cash waiting for yields to go up.”
Diversify.
With state and local fiscal issues in the limelight, Layman believes this is a good time to cast a wide geographic net for municipal bonds, even if it means sacrificing some tax breaks. “We used to have portfolios that were 75 percent invested in in-state bonds because their yields are tax-free at the state level,” he says. “Now, a typical portfolio might have one-third of assets from in-state bonds, and the rest from out of state.”
In the corporate market, where default rates are somewhat higher than municipals, Jones suggests using at least ten different issuers in a variety of sectors such as utilities, financials, industrials and technology.
Plan to hang on until maturity.
This important part of the strategy is particularly relevant in a low-rate environment. If interest rates rise you’ll likely forfeit some of your original investment and lose money to transaction costs if you cash in your bonds or CDs before they mature. You have to be prepared to watch rates move and avoid the temptation to bail out early.
* Telenor says JV board followed “prescribed processes”
(Adds Telenor statement)NEW DELHI, Oct 11 (Reuters) - Telenor’s India
mobile phone joint-venture partner Unitech said on
Tuesday it has filed a petition before the Company Law Board in
India, alleging mismanagement of the venture by the Norwegian
firm and its key executives, escalating a rift between the
partners.The Company Law Board is an independent quasi-judiciary body
that rules on corporate matters.Telenor and Unitech have been at loggerheads over a planned
$1.7 billion rights issue in the joint venture, which trades
under the Uninor brand name. Telenor owns 67.25 percent of the
joint venture and Unitech owns the remainder.Telenor had said the rights issue was to secure long-term
funding for the venture as bank loans to the telecoms sector had
dried up after a graft scandal.Unitech, which is India’s No.2 listed property firm, said
Telenor had refused a long-term debt of 90 billion rupees ($1.8
billion) last November from India’s top lender State Bank of
India and was now seeking to “enforce” a rights issue.Unitech said the joint venture does not now need funds and
that Telenor and its executives had made the joint venture
approve a 10-year business plan, which the Indian firm said was
aimed at “artificially depressing” the valuation of the venture.Unitech also said Telenor and its executives were not
running the business in the best interest of Uninor and its
workforce.Telenor said in a statement on Tuesday Uninor’s board wanted
the two owners to invest more in the company after following the
“prescribed processes”.”Valuations, being a part of the rights issue process, are
legally confidential between the owners and we would like to
maintain that confidentiality on our part,” Telenor said.The joint venture Unitech Wireless and Unitech’s managing
director, Sanjay Chandra, are among the three companies and 14
people charged by Indian police in a massive telecoms licensing
scandal. All accused have denied any wrongdoing.Telenor had said that the events described in the police
charges predate its investments in India.