American Association of State Compensation insurance Fund
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member fund.

CopperPoint Mutual Insurance Company
Phone: (602) 631-2000
Address: 3030 North Third Street
Phoenix, AZ   85012

State Compensation Insurance Fund
Address: 333 Bush Street
Suite 800
San Francisco, CA   94104

Pinnacol Assurance
Phone: (303) 361-4000
Address: 7501 East Lowry Boulevard
Suite 800
Denver, CO   80230-7006

Hawaii Employers' Mutual Insurance Co. Inc.
Phone: (808) 524-3642
Address: 1100 Alakea Street
Suite 1400
Honolulu, HI   96813

Idaho State Insurance Fund
Phone: (208) 332-2100
Address: 1215 West State Street
P.O. Box 83720
Boise, ID   83720-0044

Kentucky Employers Mutual Insurance
Phone: (859) 425-7800
Address: 250 West Main Street Suite 900
P.O. Box 83720
Lexington, KY   40507-1724

Louisiana Workers' Compensation Corporation
Phone: (225) 924-7788
Address: 2237 South Acadian Thruway
P.O. Box 83720
Baton Rouge, LA   70808

Maine Employers Mutual Insurance Company (MEMIC)
Phone: (207) 791-3300
Address: 261 Commercial Street
P.O. Box 11409
Portland, ME   04104

Chesapeake Employers’ Insurance Company
Phone: (410) 494-2000
Address: 8722 Loch Raven Boulevard
P.O. Box 11409
Towson, MD   21286-2235

SFM Mutual Insurance Company
Phone: (952) 838-4200
Address: 3500 American Boulevard West Suite 700
P.O. Box 11409
Bloomington, MN   55431-4434

Missouri Employers Mutual Insurance
Phone: (800) 442-0590
Address: 101 N Keene St
P.O. Box 11409
Columbia, MO   65201

Montana State Fund
Phone: (406) 495-5015
Address: 855 Front Street
P.O. Box 4759
Helena, MT   59604-4759

New Mexico Mutual Group
Phone: (505) 345-7260
Address: 3900 Singer Boulevard NE
P.O. Box 4759
Albuquerque, NM   87109

New York State Insurance Fund
Phone: (212) 312-7001
Address: 199 Church Street
P.O. Box 4759
New York, NY   10007

Workforce Safety and Insurance
Phone: (701) 328-3800
Address: 1600 East Century Avenue Suite 1
P.O. Box 4759
Bismarck, ND   58506-5585

Ohio Bureau of Workers Compensation
Phone: (800) 644-6292
Address: 30 West Spring Street
P.O. Box 4759
Columbus, OH   43215-2256

CompSource Mutual Insurance Company
Phone: (405) 232-7663
Address: 1901 North Walnut Ave.
P.O. Box 53505
Oklahoma City, OK   73152-3505

State Accident Insurance Fund (SAIF)
Phone: (503) 373-8000
Address: 400 High Street SE
P.O. Box 53505
Salem, OR   97312-1000

Pennsylvania State Workers Insurance Fund
Phone: (570) 963-4635
Address: 100 Lackawanna Avenue
P.O. Box 5100
Scranton, PA   18505-5100

Beacon Mutual Insurance Company
Phone: (401) 825-2667
Address: One Beacon Centre
P.O. Box 5100
Warwick, RI   02886-1378

South Carolina State Accident Fund
Phone: (803) 896-5800
Address: P.O. Box 102100
P.O. Box 5100
Columbia, SC   29221-5000

Texas Mutual Insurance Company
Phone: (800) 859-5995
Address: 6210 East Highway 290
P.O. Box 5100
Austin, TX   78723-1098

Workers Compensation Fund
Phone: (800) 446-2667
Address: 100 West Towne Ridge Parkway
P.O. Box 2227
Sandy, UT   84070

Washington Department of Labor and Industries
Phone: (360) 902-5800
Address: P.O. Box 44001
P.O. Box 2227
Olympia, WA   98504-4001

Wyoming Division of Workers Safety & Compensation
Phone: (307) 777-7159
Address: Cheyenne Business Center
1510 East Pershing Boulevard
Cheyenne, WY   82002

Workers Compensation Board - Alberta
Phone: (780) 498-3999
Address: 9925-107 Street
P.O. Box 2415
Edmonton, AB   T5J 2S5

Workers Compensation Board of British Columbia (WORKSAFEBC)
Phone: (604) 273-2266
Address: P.O. Box 5350 Station Terminal
P.O. Box 2415
Vancouver, BC   V6B 5L5

Manitoba Workers Compensation Board
Phone: (204) 954-4321
Address: 333 Broadway
P.O. Box 2415
Winnipeg, MB   R3C 4W3

Phone: (506) 632-2200
Address: 1 Portland Street
P.O. Box 160
Saint John, NB   E2L 3X9

Workers Compensation Board of Nova Scotia
Phone: (902) 491-8999
Address: 5668 South Street
P.O. Box 1150
Halifax, NS   B3J 2Y2

Prince Edward Island Workers Compensation Board
Phone: (902) 368-5680
Address: 14 Weymouth Street
P.O. Box 1150
Charlottetown, PE   C1A 7L7

Saskatchewan Workers Compensation Board
Phone: (306) 787-4370
Address: 200 - 1881 Scarth Street
P.O. Box 1150
Regina, SK   S4P 4L1

Puerto Rico State Insurance Fund Corporation
Phone: (787) 793-5959
Address: G.P.O. Box 365028
P.O. Box 1150
San Juan, PR   00936-5028
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Latest Newsletter

Collateralized Loan Obligations: A Smart Way to Gain Credit Exposure

Insurance investment professionals today are constantly looking for better ways to control risk and increase interest income. Many professionals are looking to Collateralized Loan Obligations (CLO) as a potential investment, as they offer many attractive features that make them a valuable part of an institution’s investment portfolio.

First, we’ll explain what constitutes a CLO. A CLO involves pooling roughly 100–200 bank loans into a fund. A Special Purpose Vehicle (SPV), or warehouse in CLO lingo, holds the loans as a trustee while the loans close. The stream of payments from the loans is then securitized into multiple tranches and sold to investors. Each tranche has different characteristics designed to appeal to a variety of investors. The characteristics of the tranches come from having different priority in receiving payments from the loan pool as a whole. AAA rated tranches—the least risky—receive the first payments from the entire pool of loans, AA receive the next payments from the entire pool, and so on throughout the capital structure down to the lowest in priority, the equity tranches. Yields for each tranche reflect this waterfall of payments, as they have different risk levels. As of the beginning of June, AAA yields are 3-month Libor (3  mL) + 100–120 bps and BBB yields are 3 mL+ 320–360 bps, while equity is priced to earn 10–13% over the life of the fund, assuming all loans pay as expected. With 3 mL at 120 bps or 1.20%, a BBB CLO yields 4.40% to 4.80%. For comparison, BBB corporate bonds yield in the sub 4% range. When you consider that you are receiving the same NAIC classification as similar rated corporates, the extra yield provided by CLOs is very attractive to income-oriented or capital-constrained investors.

When comparing the default rates and recovery rates of CLOs to corporate bonds, CLOs offer a more compelling way to access the investment grade credit spectrum. Data over the last three decades show that CLOs have enjoyed lower default rates than similar rated corporate bonds. Additionally, the recovery rate of 80% for CLOs is significantly higher than the 49% for senior unsecured bonds or the 28% for subordinated debt.

The structure of the CLOs’ cash flow provides a superior risk/reward to the higher rated tranches when compared to similar rated corporate bonds. Structural features in the waterfall of payments, such as the overcollateralization and interest coverage tests, provide self-correcting mechanisms that redirect payments to investors in higher rated tranches should defaults being to rise. This helps to reduce default rates in the higher rated tranches and significantly reduces the negative skew associated with fixed income returns. Add to this the fact that no CLO debt tranche above a single-A rating has ever experienced a principal loss, and it is easy to see how the structure reduces traditional risks for investors.

In a low interest rate environment with the Federal Reserve eager to raise interest rates, the floating rate nature of CLOs is an attractive diversifier to a portfolio comprising mainly fixed rate investments. CLO pricing is based on LIBOR plus a spread and is reset quarterly. This allows interest payments from the CLO to rise as LIBOR rises, which is more likely when short-term interest rates are rising. With the duration of only .25 years and a weighted average life often in the 5+ year range for higher rated tranches, this is much more of a pure play on credit rather than on credit and interest rates.

The diversification offered by CLOs may prove valuable over the coming years if interest rates keep rising, as they would offer increasingly higher interest payments. This is the exact time that the prices of your traditional bonds are likely to be declining. While this won’t have a direct effect on surplus for insurers holding investment grade bonds, it may limit your ability to rebalance without impacting surplus by recognizing losses.

With the emergence of CLO 2.0 & 3.0 structures, the basic structure of CLOs received investor-friendly refinements when compared to CLO 1.0 structures. Higher levels of credit enhancement, shorter reinvestment periods, higher first lien asset minimums, and lower amounts of CCC assets are examples of the improvements upon CLO 1.0 for investors. Without going into too much detail, all of these modifications to the structure of the CLO decrease risk to the investor by either reducing uncertainty or increasing credit quality.

If you are looking to diversify credit risk, taking risk in BBB rated CLOs in addition to, or even in place of, BBB rated corporate bonds is worth exploring.



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