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Insurance companies are playing it safe — and doing it well

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By David Freitas
23 Jun 2020

The repeated presence of European issuers in the bond market of late is testament to the prudence with which they are building up capital for what could be tough times ahead.

European insurance companies have sought more than €8.2bn of funding so far this year in the euro and sterling markets, according to Dealogic — €2bn more than they had printed by this time last year.

Only 15% of this year's total was issued before the coronavirus pandemic hit the capital markets in late February.

Bearing in mind there was no issuance throughout most of March, the speed and volume of issuance has been staggering but it shows how responsive the sector has been to the economic problems that Covid-19 has posed.

Financial institutions have learned that this is a market where issuance windows must be taken advantage of. Good opportunities, if missed, might not return.

The outbreak of the coronavirus pandemic drove insurers' credit spreads to widen, although they have recently begun to tighten. With the recovery came volatility, though, discouraging market participants from taking good issuance conditions for granted.

Nonetheless, European insurers have acted to keep their capital ratios above the regulatory requirements and inside targets at a time when they could face lower premium income and higher payouts.

CNP Assurances, on Tuesday, or Aviva in the sterling market last month, have been among those managing their debt levels through the refinancing of outstanding bonds.

Others, like Helvetia Europe on Tuesday or Phoenix Group Holdings last month, sought funding in the bond market to finance new acquisitions and strengthen their portfolios.

There have been transactions too that market participants had not expected to see earlier this year. Swiss Re’s tier two last month, for instance, was aimed at strengthening its balance sheet.

Insurance companies’ balance sheets are also yet to endure a spell of corporate defaults from companies unable to survive the adversities of the pandemic.

To this end, insurers have made sure they used favourable windows whenever possible, while sending the message that they are aware that the hard times are far from over.

The industry itself is in good shape, according to S&P, which said this week that “the relatively strong credit quality of insurers shines when compared with non-financial corporate sectors”.

“Despite higher credit spreads triggered by the pandemic-induced recession and market jitters, insurers are still accessing the debt capital markets at favourable coupon rates,” the ratings agency said.

Other sectors have plenty of reasons to look at the insurance sector for inspiration as it has sought to prevent, rather than fix, misfortune, monitoring the market and then acting without hesitation.

By David Freitas
23 Jun 2020