Insurance debt remains attractive, refinancing need drives opportunity

The debt issuances of insurance and reinsurance carriers remain an attractive option for investors even under the shadow of the Covid-19 pandemic and there could be more opportunity to come.

Insurance and reinsurance company debt issues, private or otherwise, remain an asset that certain insurance-linked securities (ILS) fund managers allocate capital to, while some investment managers in the ILS space have dedicated private insurance debt mandates and funds as well.

Investing in insurance or reinsurance debt is seen as another way to access the balance-sheet returns of the sector and in the current market environment, when re/insurers have been largely able to remain well-capitalised despite the pandemic, debt investments could be increasingly appealing for some.

In a recent report, S&P Global Ratings explained that, “Despite higher credit spreads triggered by the pandemic-induced recession and market jitters, insurers are still accessing the debt capital markets at favorable coupon rates.”

“Insurance bonds remain attractive to investors, providing diversification, relatively favorable yields, and high security–with an average issuer credit rating in the ‘A’ category,” explained S&P Global Ratings’ analyst, Ali Karakuyu. “We believe much of the issuance to date has been opportunistic, with some insurers taking advantage of favorable market conditions instead of repairing weakened balance sheets.”

Interestingly, S&P highlights that there is a potential $140 billion investment opportunity on the horizon in insurance and reinsurance company debt.

There is $140 billion, which is roughly 20% of total outstanding debt, coming up for call or maturity by December 31st 2021, S&P said.

While the majority of insurers and reinsurers should be able to redeem or refinance as needed, this will provide an opportunity for the more innovative, private financing focused ILS fund managers that also allocate to debt to offer solutions.

In particular, the ILS fund managers that also allocate investor capital into debt issuances tend to do so for catastrophe exposed insurance carriers, but some more broadly as well.

What is making re/insurance debt particularly attractive during the Covid-19 pandemic, is the relatively strong credit quality of insurers, which S&P says “shines when compared with nonfinancial corporate sectors.”

Dynamics may drive even more debt issuance, S&P believes, explaining that, “We recognize that some investors are cautious of potential losses to lockdown-related claims on the property/casualty (P/C) side 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.

“This is the reason that rating actions across the insurance sector have been limited this year. 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.”

All of which adds up to an attractive time to look to the insurance and reinsurance sector as a source of debt investments for institutions and may help to drive further interest in the strategies of ILS managers that also operate debt focused funds as well.