The crisis being seen in banking sectors, most prominently with the failure of Silicon Valley Bank and sale of Credit Suisse to UBS, is not a crisis of the insurance sector, and there are no fundamentals to support the recent revaluation of insurance debt, Plenum Investments has stated.
In fact, with the fallout of the banking crisis having impacted subordinated insurance debt valuations, Plenum Investments now sees an opportunity to add to positions in the asset class at attractive valuations.
“In light of the recent events surrounding Silicon Valley Bank, Credit Suisse and others we reiterate that the situation is not a crisis of the insurance sector,” Plenum Investments explained.
Adding that, “Contagion risk for the insurance sector is very remote in our view and the recent revaluation of subordinated insurance paper is in our view an opportunity to add subordinated insurance paper.”
The catastrophe bond and insurance-linked securities (ILS) investment manager explains that the insurance sector is well-capitalised, with ample excess capital among insurers in its coverage.
Reserving is more of a risk than liquidity and insurance and reinsurance companies are not forced sellers of assets, while there is hardly any empiric evidence of a run risk in the sector, Plenum notes.
Exposure to banks is also limited, with most re/insurers lowering their exposure to the banking sector in recent years.
In addition, Plenum highlights that, “A drop in the Solvency II ratio of an insurer is no indicator for a change in liquidity, but shows available capital relative to capital required to survive a 1-in-200 year balance sheet shock.”
While on the subordinated debt side, “Only a small number of institutional bonds have a first call date in 2023, some of which have already been refinanced. We do not see the sector’s strong track record of calling all traded institutional bonds at the first call date at risk.”
Plenum concludes that, “Against this background there is in our view no fundamental support for the recent revaluation of subordinated insurance debt which was caused by a general financials sell-off and rebalancing of portfolios.”
In reality, investors stand to benefit from the limited impact of the current situation in the banking sector on the credit quality of insurance and reinsurance companies, as well as the absence of contagion risk into the insurance sector.
As a result, “The recent sell-off offers a good window of opportunity for investors to invest in the high quality of insurance balance sheets at very low levels,” Plenum Investments believes.
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