London:
S&P Global Ratings expects the insurance sector to tap the global debt markets and refinance, as needed, its upcoming redemptions in line with investor expectations.
“We estimate that about $140 billion (or 20% of total outstanding debt) of debt is coming for call or maturity by Dec. 31, 2021,’’ said S&P
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.
“We expect that the sector will not face high hurdles in refinancing upcoming calls and maturities. Following the redemption of about $25 billion of debt between January and May 2020, the sector is set to refinance nearly $140 billion by the end of 2021 ($52 billion between June and December 2020, including about $23 billion of hybrids with upcoming call dates during this period). Half of this is due to hybrids reaching call dates and the remainder is debt coming to maturity. We recognize some insurers have already pre-financed upcoming calls or maturities,'' said a S&P analysis.
Since the global financial crisis, lower funding costs from the low interest rates, as well as perhaps investors' tolerance for higher debt loads, has spurred the increased issuance of debt in global capital markets, said the analysis.
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On average, insurers have been able to issue senior debt and hybrids at low coupon rates so far in 2020. This is despite uncertainty around COVID-19-related claims, with some industry loss estimates exceeding $100 billion. There is also uncertainty relating to the upcoming hurricane season, notably for those with material exposure to North America, as well as the claims inflation (also known as social inflation) for the U.S. casualty lines.
Insurers' debt outstanding has also increased steadily, almost doubling in the past 10 years . But that increase in insurers' debt has been broadly in line with their increase in capital and therefore financial leverage (20%-30%) remains supportive of our ratings.
Many insurers that are active in the debt market accessed the capital markets in the first half of this year and the trend is expected would continue.With about $73 billion of new debt globally, the sector issued slightly more than in the same period of 2019 . This issuance volume has been particularly noticeable given the slowdown in market appetite in early 2020 and despite the doubling of insurance credit spreads during March 2020, which have since declined.
Overall, credit spreads are well below the levels we saw during the global financial crisis, and more favorable than those seen across many other sectors.
Investors are particularly sensitive to credit quality when the economic environment is uncertain, which should advantage insurers' issuances. This is due to the relatively strong credit quality of insurers, which shines when compared with nonfinancial corporate sectors.
“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,’’ explained S&P.