As bonds become bonds again, investors should look to insurance debt: Plenum

In a webinar held this week, executives from specialist insurance-linked securities manager Plenum Investments explained that subordinated insurance debt is a rare category that is benefiting from volatility in government bond markets.

Government bond yields have surged to historically attractive levels, but Plenum Investments highlighted that subordinated insurance bonds can offer an additional spread of around 140 basis points.

That makes them an attractive option at this time, compared to other corporate or government bonds. But Plenum also believes there are other reasons investors should look to the insurance and reinsurance market for this type of fixed income allocation.

Daniel Grieger, Managing Partner and Senior Portfolio Manager at Plenum Investments, explained that there is a “persistent insurance-sector premium” in subordinated bonds, a structural premium for RT1 over Tier 2, and RT1 coupons that currently exceed corresponding dividend yields.

At the same time, he noted that insurance debt supply remains more limited, especially at a time when there is an abundance of other debt issuance in the markets. Which means specialist investment managers can be best placed to capture this opportunity for their clients.

Rotger Franz, Partner and Portfolio Manager, explained during the webinar, “This is a very volatile time in bond markets, and we feel that there is a huge opportunity opening up. The reason why we wanted to talk about subordinated insurance debt now, amid the government debt surge, is that we see insurance companies to be one of the very few sectors that are actually net beneficiaries of rising rates.

“But the main message that we have today, is that the risk-free base is back.”

He said that the acceleration in government bond yields has created a situation where “where bonds are bonds again.”

“The question that we have to answer for you today is: if government bonds are yielding again, why should you invest in subordinated insurance bonds?” Grieger said.

Those five reasons are: that the yields are higher, by around 140 basis points; that supply in insurance bonds is scarce so they can deliver a premium; but at the same time the quality of the credits remains similar; while in the current environment insurers are net beneficiaries of rising interest rates; and finally that in contrast to banks, insurers offer a better credit quality.

Grieger went on to explain that in subordinated insurance debt, “The sector premium, the spread that insurers pay in addition to other sectors, has always been there. It is persistent.”

Compared to corporate credit, Grieger said, “Even though insurers have the better rating, their spread is higher. This is an anomaly. We think it is because it’s just a tiny niche, but it is there, and it is persistent over time. This extra spread, of course, leads to outperformance.

“So, it makes a lot of sense to invest in insurance bonds instead of government debt.”

Grieger explained that Plenum’s own European Insurance Bond Fund, which has a five year track-record and a current yield of around 5.8% in Euros.

“This is quite a high yield considering that we are talking about investment-grade credits,” he explained.

“In short, the risk-free base is back, and with sector and structural premium, we are able to deliver an additional 140 basis points.”