Market Overview
Year ends are hyperbole season: the period when commentators reach into the tired toolbox for overused terms to describe the year just past. Regardless of events, returns and risks, the passing year will be described as “challenging”, while the year ahead will be welcomed with some scent of optimism.
From fiscal easing to monetary boost
This optimism might not be misplaced in 2026. Our base case scenario for 2025 looked for sub-trend growth to continue. Despite the shock of tariffs, inflation has broadly cooled in the year, although it has remained sticky. Resilient GDP growth has been supported by robust private sector capex, led by promises of artificial intelligence productivity gains.
Where there was intrigue in 2025, it was most frequently found in the public sector, with fiscal policy in focus. However, the coming year might see the emphasis fall more on monetary policy choices. As policy rates loosen monetary conditions, growth should begin to recover.
Resilient economic growth and thus consistent earnings growth led to a good year for insurance investors in 2025: investment grade credit performed well, while government bonds also delivered positive returns. This performance was accentuated by modest levels of new issuance, which left buyers to bid for paper. Investment grade markets therefore enter the new year in robust health, with spreads that reflect a level of investor enthusiasm. This is good news for holders of assets in the space as we move into the new year.
More opportunities to optimise portfolios
2026 might be exciting for insurers for another reason: the range of solutions available to optimise portfolios continues to grow, helping insurers to build better, more resilient balance sheets. Whether public or proprietary, the ability to combine cash flows of different physical instruments and derivatives into customised cash flows is becoming more accepted by insurers.
Embedding hedges into these strategies enables cross border capability, again to the advantage of the insurer. Applications go farther, with efficient portfolio construction extending into asset liability management tools such as interest rate and inflation swaps.
Custom solutions and credit linked notes
Credit linked notes (CLNs) are a prime example of this proliferation. The matching adjustment potential of credit linked notes is clear, offering a material alternative to building such solutions manually with bonds.
A credit linked note might contain one or many bonds, but when combined with a credit default swap (CDS) and wrapped in a special purpose vehicle, it becomes a single security, tradeable solution offering a range of enhancements. Yield and spread are only the beginning, as maturity and coupon can also be customised. Importantly, many CLNs do not require collateral, because of their non-recourse nature.
In this quarter’s publication, we include highlights of a warmly received piece on credit-linked notes that looks at this proliferation and the opportunities it creates.
Author: Giles Bedford, Senior Investment Specialist, EMEA Insurance