Insurance bonds among best paying for yields, with significant upside: Twelve

Insurance bonds should not be ignored as a defensive investment opportunity with both yield and upside potential, according to Twelve Capital, with the manager believing that market dynamics have created a particularly attractive entry point for investors.

With global financial and capital markets volatility continuing, inflation high, interest rates rising and a continued backdrop of geopolitical volatility, the investment manager believes the insurance bond segment offers real value at this time.

Twelve Capital manages assets across the insurance and reinsurance return spectrum, from catastrophe bonds, through collateralised reinsurance or private insurance-linked securities (ILS), to equities and also debt instruments.

Insurance bonds, so effectively insurance or reinsurance company-linked credit and sometimes also debt instruments, in note or bond format, have naturally been affected by the fixed income market volatility that has been seen through the first-half of 2022.

Spreads have widened “at record pace” in insurance bonds, as has been seen across fixed income.

But Twelve Capital believes that, “In this recent bout of sustained volatility, the Insurance Bond universe has in Twelve Capital’s view been unjustifiably penalised. Yields have also widened to historical levels, also due to the moves in underlying government bond markets.”

This has led to spreads at “unjustifiably elevated levels, despite the sector’s strong fundamentals underpinned by Solvency ratios on average at 216%, which provides protection in a deteriorating macro backdrop,” the asset manager explained.

Dinesh Pawar, who manages Insurance Bond strategies at Twelve Capital, commented that, “Investing in Insurance Bonds has always rewarded those investors who take the complexity premium the sector offers. Additionally, they benefit from investing in high quality capital in one of the most defensive sectors.”

Further explaining that, “Recent market dynamics have created one the most compelling entry points for the insurance sector.”

Insurance and indeed reinsurance companies have shown resilience in past crises and the sectors fundamentals, as well as firms high solvency scores, both suggest that with insurance bonds at elevated spread levels the opportunity for investors could be meaningful.

Underscoring the reliability of this insurance investment segment, Twelve Capital explained, “Throughout the global financial and peripheral European sovereign crises of 2007 to 2012, only one coupon was missed to credit investors in European insurers and only one insurer had to suspend coupon payments (which were accrued and paid at a later stage), to the best of Twelve’s knowledge.”

Right now, Twelve Capital believes that “No other sector offers such a convincing risk reward for rating to yield,” with the average insurance bond sector yield sitting at 5%.

The high solvency levels of re/insurers provides a level of “protection in a deteriorating macro backdrop” that should make the segment more attractive, Twelve said.

While the elevated yields makes this one of the best paying segments, and Twelve believes there is further upside potential it deems “significant.”

“At current levels the potential upside for performance is meaningful, given how stretched yields have become, and therefore an attractive entry point has now emerged,” the investment manager further explained.

Summarising, “Twelve Capital believes there is value in Insurance Bonds both from a positive yield and fundamental perspective. In this context we believe investors should tilt their portfolios towards being more defensive in nature and hence Insurance Bonds cannot be ignored.”