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Insurers' debt attractive amid pandemic: S&P

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A “flight to quality” by investors during the COVID-19 pandemic is helping insurers to tap into debt markets, S&P Global Ratings says.

“Insurance bonds remain attractive to investors, providing diversification, relatively favourable yields and high security, with an average issuer credit rating in the ‘A’ category,” Analyst Ali Karakuyu says.

“We believe much of the issuance to date has been opportunistic, with some insurers taking advantage of favourable market conditions instead of repairing weakened balance sheets.”

S&P estimates that about $US140 billion ($201 billion) of insurance debt, or 20% of total outstanding debt, is set to be redeemed or refinanced by the end of next year.

Some investors may be cautious about lockdown-related property and casualty claims or concerned about capital market volatility impacts, but S&P says those issues are more likely to be an earnings event for insurers rather than a capital event.

“This is the reason that ratings actions across the insurance sector have been limited this year,” it says.

“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.”

S&P says the strong credit quality of insurers “shines” when compared to the nonfinancial corporate sectors, but investors still demand a relatively high return.

“This could be due to a number of factors, including insurers’ complex and capital-intensive business models,” the ratings group says. “Nevertheless, we continue to see strong demand for insurance debt in 2020, with most new issuances substantially oversubscribed.”