Investment in insurance debt is attractive with high levels of Solvency II: Plenum

Investors should look to subordinated insurance bonds because with high spreads, the opportunity to invest in bonds issued by large capitalization companies with high Solvency II ratios is an attractive opportunity, according to Plenum Investments.

This year, while many other bond markets have been affected by spread-related issues, but at a time when fundamentals have deteriorated, the insurance and reinsurance market has seen higher rates and low levels. increasing capital requirements, making their subordinated bonds particularly attractive compared to other segments. .

In a recent article, Rötger Franz, Partner, Plenum Investments Ltd., explained that “current valuations in the insurance industry do not reflect fundamentals in our view. Compared to other industrial sectors, the capitalization of the insurance sector has increased further since the beginning of the year.

Debt for insurance and reinsurance companies looks particularly high quality, as the sector has largely posted decent profits for 2021 and allowed companies to reduce debt, repurchase shares and reissue in some cases.

Plenum believes that higher interest rates will support the already decent Solvency II levels of insurance bond issuers, although some may face markdowns on investments in the current climate as they report results of the second trimester. Write-downs on investments to date have been manageable so far.

One area of ​​uncertainty was the war in Ukraine, but the disclosure of losses so far by insurance and reinsurance companies is no cause for concern about their debt issues, Franz said.

Even with the aviation claims that could potentially come to market from Russia’s war in Ukraine, Franz explained, “Any adverse development is unlikely to turn into a momentous event.”

The main issue market for private insurance debt and bond issues came back to life in May, Franz said.

“All new issues performed positively in the first few days of trading and outperformed the market, allowing investors – unlike previous months – to realize a good new issue premium,” he said. yet explained.

“In our view, the recent new issuances remove a backlog that has built up over the past few weeks and this backlog needed to be cleared before the market could resume trading as usual,” Franz continued, saying, “ Additionally, we note that many funds are sitting on high levels of cash to prepare for redemptions.

Regarding the investment opportunity, Franz explained that the spreads are high and given the quality of the issuers and their level of solvency, the opportunity is therefore attractive.

“Insurance bond spreads have reached levels not seen since the decline in March 2020, when a massive sell-off occurred in the markets due to the pandemic.

“Return levels on a EUR-hedged basis are close to 4% in the Bloomberg Insurance Subordinate Total Return Index and are much higher in certain sub-segments of the market such as restricted Tier 1. remember that most of the issues in this index are rated investment grade.

“These high spread levels should provide additional comfort to investors and will serve as a hedge against possible further spread widening. Investors are now able to benefit from higher spreads with higher Solvency II ratios compared to the beginning of the year. ‘year,” stressed Franz from Plenum.

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John A. Bogar