Mispricing of re/insurance makes entry point attractive for debt investment: Twelve

According to asset manager Twelve Capital, the resilience of the global insurance and reinsurance market during periods of protracted stress makes investing in insurance-linked debt a reliable asset for the bond allocation of any investor.

As global financial and capital markets face increased headwinds, due to the geopolitical volatility we have seen and the longer-lasting inflation outlook, the insurance-linked debt asset class is another option investors should look to, the investment manager believes.

Twelve Capital manages assets across the full spectrum of insurance and reinsurance returns, from catastrophe bonds and secured reinsurance to equities and 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 the moment.

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

Re/insurer fundamentals are once again proving the resilience of sectors in times of stress, the asset manager said, and in the insurance market in general they are saying: “We believe the sector is strongly positioned to maintain its investment grade credit quality and low default rate.

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

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

“Insurance is probably the most undervalued sector in the fixed income markets, creating an excellent entry point,” continued Twelve Capital.

The investment manager clarified: “The spread paid by insurance debt has increased by almost 80% to 260 basis points since the low point recorded at the end of the third quarter of 2021 (12.05.2022 compared to 30.09 .2021). The current levels, together with the attractive structural characteristics of insurance debt (primarily fixed-to-floating maturity bonds) provide an excellent entry point for investors looking for yield and safety.

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

The manager also pointed out that relative value opportunities were abundant, such as life insurers in Europe whose capital ratios are strongly tilted towards higher rates, short-term bonds where there is an incentive to redeem and insurers where the markets’ reaction to potential losses due to the conflict in Ukraine is considered to be exaggerated.

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John A. Bogar