June 12, 2024

Most insurers would concede that relative value often guides decision making. Higher interest rates have shifted insurers’ focus, and previously niche asset classes have garnered more attention given their compelling advantages in today’s environment.

The floating-rate debt tranches of collateralized loan obligations (CLOs), particularly tranches with investment grade (IG) ratings (AAA-BBB), are one such asset class attracting the interest of insurance companies. In a “higher for longer” rate environment, insurers are capturing elevated yields in an asset class which has historically exhibited less default risk than corporate bonds.

With a typically significant allocation to fixed income, insurers would therefore be well-advised to consider IG CLO tranches given their compelling characteristics:

Endnotes
This presentation has been prepared by Octagon Credit Investors, LLC (the “Investment Manager” or “Octagon”) solely for information purposes and is not an offer to sell or the solicitation of an offer to buy an interest in any security which can only be made by a private placement memorandum that contains important information about the proposed product’s risks, fees and expenses (the “Supplemental Disclosure Documents”). Securities are offered through Conning Investment Products, Inc., an affiliated broker dealer and member of FINRA and SIPC. Conning, Inc., Goodwin Capital Advisers, Inc., Conning Investment Products, Inc., a FINRA-registered broker-dealer, Conning Asset Management Limited, Conning Asia Pacific Limited, Octagon Credit Investors, LLC, Global Evolution Holding ApS and its subsidiaries, and Pearlmark Real Estate, L.L.C. and its subsidiaries are all direct or indirect subsidiaries of Conning Holdings Limited (collectively, “CHL Group”) which is one of the family of companies whose controlling shareholder is Generali Investments Holding S.p.A. (“GIH”) a company headquartered in Italy. Assicurazioni Generali S.p.A. is the ultimate controlling parent of all GIH subsidiaries. Conning has investment centers in Asia, Europe and North America.
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Some information in this presentation reflects proprietary research based upon various data sources. In addition, some information cited in this presentation has been taken from third-party sources that are believed to be reliable but which have not been verified for accuracy or completeness. Octagon is not responsible for errors or omissions from these sources. No representation is made with respect to the accuracy, completeness or timeliness of information and Octagon assumes no obligation to update or otherwise revise such information. Prospective clients, including those subject to ERISA, should note that this presentation is being furnished to you on the condition that it will not form a primary basis for any investment decision. The Investment Manager makes no representation that the information contained in this presentation is accurate or complete, nor does it review or assume any responsibility for any information received from, or created by, any third parties, including the performance data of indexes and benchmarks. Views expressed herein are subject to change without notice. All data concerning returns and satisfaction of performance tests are historical and based on the Investment Manager’s knowledge; as such, they do not represent current performance levels, some or all of which may have changed since the dates referenced herein. Performance achieved prior to December 31, 2021 was predominantly based on investments that used USD LIBOR as a reference rate. With LIBOR being phased out over the period of time from 2022 through 2023, and the syndicated debt and CLO securities markets transitioning to alternative reference rates, primarily CME Term SOFR, it is possible that this transition has affected returns and 
that syndicated debt and CLO securities could achieve different returns after this transition than they might have achieved if referencing LIBOR. This document does not constitute investment, tax, legal, regulatory or accounting advice. Under no circumstances should this document be used or considered as an offer to sell or a solicitation of an offer to buy any security, financial instrument or investment vehicle. Investors are advised to make an independent review regarding the economic benefits and risks of purchasing or selling the financial instruments mentioned in this document to determine whether an investment is suitable for them and reach their own conclusions regarding the legal, tax, regulatory, accounting and other aspects of any transaction in the financial instrument in relation to their particular circumstances. Investments described herein carry a risk of loss, which could be significant, and that investors should be prepared to bear.
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General Risks related to Alternative Investments: General Economic and Market Conditions, Increased Regulatory Oversight, Use of Borrowed Funds, Complexity of Trading Strategy—Reliance on Technology, Futures, Commodities and Derivatives, Hedging Transactions, Options, Short Sales, and Risk of Global Investing. Risks related to an investment in a strategy: Absence of Operating History, Absence of Regulatory Oversight, Nature of Investments, Business and Regulatory Risk of Hedge Funds, Portfolio Turnover, Risk of Varied Performance, Potential Lack of Diversification, Potential Exposure to Prime Brokers, Potential Exposure to Derivative Counterparties, Execution of Transactions, Certain Tax Risks, Reliance on Manager, Absence of Secondary Market, Operating Deficits, Economic Conditions, Calculation of Operational Net Fund Value, Market Risk, Investors not to Participate in Management of the Fund, Illiquidity of Interests, and Distributions In Kind.

Risk Factors Associated With CLO Debt Investing May Include (But Are Not Limited To):
COMPLEXITY: CLOs often involve risks that are different from, or more acute than, risks associated with other types of debt instruments: 
The complex structure of the security may produce unexpected investment results
Ratings agencies may downgrade their original ratings of CLO debt tranches
Majority equity holders retain the right to call or refinance/reprice a CLO, creating uncertainty for minority equity and debt holders
LIQUIDITY RISK
CLOs may be difficult to value and may constitute illiquid investments
DEFAULT RISK OF UNDERLYING CLO INVESTMENTS
During periods of economic uncertainty and recession, the incidence of modifications and restructurings of investments may increase, resulting in impairments to the underlying asset value and reduced “subordination” to the tranched CLO liabilities
REGULATION
CLOs are susceptible to changing regulations, influencing eligibility of certain investments, risk retention requirements, and other factors that can influence availability and liquidity
SOFR RISK: 
CLO debt and bank syndicated loans historically used LIBOR as an interest rate benchmark. On June 30, 2023, following a multi-year transition away from LIBOR, all USD LIBOR tenors ceased to be representative. Accordingly, most CLO debt notes and bank syndicated loans now use CME Term SOFR as a reference rate (with a minority of bank syndicated loans referencing 6-month USD LIBOR or synthetic USD LIBOR). Some CLOs have experienced or may experience a degree of mismatch between their liabilities and assets after June 30, 2023, with certain CLOs’ issued securities tied to Term SOFR and certain of their underlying collateral tied to LIBOR (or vice versa). In addition, different assets may have adopted different credit spread adjustments as part of their transition to SOFR, further contributing to a possible mismatch between CLO assets and liabilities. The aforementioned mismatch may be greater at certain points in the future versus others, and the basis risk created by this mismatch could potentially have a negative impact on returns for CLO equity noteholders. Moreover, different assets will reference Term SOFR rates for different periods of time, e.g. 1-month or 3-month. While CLO securities will typically reference 3-month Term SOFR, leveraged loans can reference different rates or time periods; accordingly, it is likely that CLOs will experience a mismatch between the CLO securities (debt and equity issued by the CLO) and underlying leveraged loan collateral. Such a mismatch could result in the CLO not collecting sufficient interest proceeds on underlying collateral to make interest payments on the CLO debt. This could result in deleveraging a CLO or could impact returns for CLO debt and equity holders. 
CLO MANAGEMENT
The activities of any CLO will generally be directed by a collateral manager; consequently, the success of any CLO will depend, in large part, on the expertise of the collateral manager’s investment professionals. Underlying assets in a CLO “turn over” over time due to sales and repayments.
GENERAL MARKET AND ECONOMIC CONDITIONS
Changing economic, political, regulatory or market conditions, interest rates, general levels of economic activity, the price of securities and debt instruments and participation by other investors in financial markets may affect the value of CLO