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Re/insurance mispricing makes debt investing entry point attractive: Twelve


The resilience of the global insurance and reinsurance market through periods of protracted stress makes investing into insurance-linked debt a reliable component for any investors fixed income allocation, according to asset manager Twelve Capital.

Twelve Capital logoWith global financial and capital markets facing increased headwinds, on the back of the geopolitical volatility we’ve seen and prospects for longer-lasting inflation, the insurance-linked debt asset class is another option investors should be looking to, the investment manager believes.

Twelve Capital manages assets across the insurance and reinsurance return spectrum, from catastrophe bonds, through collateralised reinsurance, to equities and also debt instruments.

Insurance and reinsurance company debt is currently mispriced, Twelve Capital believes, meaning this segment of the market is a particularly attractive entry point for investors at this time.

While global financial markets may be volatile and capital markets challenged, Twelve Capital notes that “insurers’ creditworthiness is resilient and it is underpinned by stable credit ratings and increasing solvency ratios.”

The fundamentals of re/insurers prove once again the sectors resilience in a time of stress, the asset manager said, and on the insurance market in general they say, “We believe the sector is strongly positioned to maintain its investment grade credit quality and low default rates.”

Despite all of the uncertainties insurance and reinsurance markets face, “The capital ratios of (re)insurers under our coverage have increased by another 10 percentage points in the first quarter of 2022 to a very comfortable 220% of the level required by their respective regulators,” Twelve Capital explained.

With one of the lowest default rates in the corporate sector, manageable leverage ratios, no reliance on short-term liquidity financing, strong and holistic risk management practices and tight regulation, Twelve Capital believes the opportunities to invest into insurance and reinsurance company debt are “significant” with this segment of the insurance-linked asset class attractive at this time.

“Insurance is likely to be the most mispriced sector within fixed income markets, creating an excellent entry point,” Twelve Capital continued to explain.

The investment manager elaborated, “The spread paid by insurance debt increased by close to 80% to 260 basis points since the low point recorded at end of the third quarter of 2021 (12.05.2022 compared to 30.09.2021). The current levels, together with the attractive structural features of insurance debt (mostly dated bonds with fix-to-floating coupons) present an excellent entry point for investors looking for yield and security.”

As a result, insurance debt is offering “attractive returns in absolute and relative terms” the investment manager said.

The manager also highlighted relative value opportunities as abundant, such as life insurers in Europe whose capital ratios are highly geared towards rising rates, short call date bonds where there is an incentive to redeem, and insurers where the markets reaction to potential Ukraine conflict losses is deemed overdone.

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