Convertible Market Dynamics and Portfolio Implications for Insurers
By David Tyson, Ph.D., CFA, Managing Director and Portfolio Manager
The convertible market has grown significantly in recent years, reflecting increased equity issuance and evolving corporate financing needs. As hybrid securities combining bond and equity characteristics, convertibles have historically delivered risk and return characteristics between equities and fixed income. For insurers, convertibles may offer a way to enhance return potential while maintaining downside protection through the bond component. Credit quality, equity sensitivity, and market composition remain key considerations for portfolio construction. As issuance expands and market conditions evolve, convertibles may play an increasing role in diversified insurance portfolios.
The convertible market has experienced a notable shift in issuance trends in recent years. Following a period of subdued issuance after the global financial crisis, activity increased significantly beginning in 2020. Issuance accelerated in 2020 and 2021 and has remained elevated, with 2024 and 2025 representing particularly strong years (see Figure 1).
Structural Characteristics of Convertibles
Convertible securities combine features of both bonds and equities. The majority are structured as bonds, with a smaller portion issued as preferred stock (see Figure 2).
A key characteristic of convertibles is the presence of a bond value, which provides a floor supported by maturity and coupon payments. Over time, the relative importance of coupon income has declined, with bond floor protection increasingly driven by maturity value.
However, as convertibles move further into equity-sensitive territory, their value converges toward equity value. Companies often call convertibles to encourage conversion into equity, particularly when the underlying stock performs well.
As equity prices decline, the bond component becomes more prominent, though increasing credit risk must be considered. This dynamic highlights the importance of credit analysis, particularly in lower price scenarios.
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Risks of Investing in Convertible Bonds
Equity market declines which reduces the value of convertibles’ equity conversion features.
A high level of corporate defaults or a sharp widening in corporate bond spreads which reduces the value of convertibles’ fixed income floors.
Low supply of issues due to prolonged low interest rates and strong demand for investment grade corporate and high yield debt.
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