Insurers’ debt instruments appeal to investors during COVID-19

By Paul McNamara

Even though the coronavirus pandemic has brought about higher credit spreads during 2020, the flight to quality has meant that insurers across the globe have retained good market access at favourable rates.

Insurers should be able to redeem or refinance the $140bn or 20% of total outstanding debt which is coming up for call or maturity by 31 December according to a recent report from S&P Global Ratings on the impact of COVID-19 on global insurers.

“Insurance bonds remain attractive to investors, providing diversification, relatively favourable yields and high security – with an average issuer credit rating in the ‘A’ category,” said S&P Global Ratings analyst Ali Karakuyu.

The ratings agency believes that much of the issuance to date has been opportunistic with some insurers taking advantage of favourable market conditions instead of repairing weakened balance sheets.

When the economic environment is uncertain, investors are particularly sensitive to credit quality which should advantage insurers’ issuances according to the agency. This is due to the relatively strong credit quality of insurers.

The agency expects the sector to tap the debt market and refinance, as needed, its upcoming redemptions in line with investor expectations.

In the hybrid space, it sees the risk of non-call as very remote, particularly given that the potential financial savings from a non-call (even on a pre-tax basis) are relatively modest.

“We recognise that some investors are cautious of potential losses to lockdown-related claims on the P&C and the capital market volatility hitting both life and P&C companies. In general we expect pandemic-related claims or investment losses to be more of an earnings event than a capital event,” said S&P Global Ratings in its report.

The agency attributed such developments to the scenario of rating actions across the insurance sector being limited this year.

It suggested that some insurers could increase their use of debt at attractive rates to boost solvency ratios or for growth opportunities, particularly on the P&C side where insurance pricing looks attractive.

Asia Insurance Review

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