In the face of the Covid-19 pandemic, Canadian insurance companies have been stampeding into the debt markets, notes a new report from DBRS Morningstar.
Already this year, Canadian insurers have issued almost $6.7 billion in bonds and preferred shares, which is more than triple the amount that they issued in 2019, DBRS said.
The report pointed to a number of factors behind the surge in debt financing, including the fact that market conditions have improved since the pandemic first hit.
“After corporate spreads widened in March and basically halted the corporate bond market following the initial impact of the coronavirus pandemic in Canada, they have since tightened, allowing insurance companies to issue debt at more favourable interest rates,” DBRS said.
The corporate bond markets have been buoyed by the Bank of Canada’s interventions to ensure stability and liquidity.
Additionally, DBRS noted that the lower interest rate environment has enabled insurers to refinance upcoming debt maturities at a lower cost compared with the start of the pandemic.
“Insurers have accessed debt markets earlier in anticipation of a more challenging economic environment later in 2020 and 2021, particularly given the uncertainty around the duration of the lockdown measures currently in place or the resurgence of new coronavirus cases once the quarantine relaxes,” DBRS said.
The report also noted that the Canadian insurers generally began the crisis with strong financial flexibility — moderate leverage and strong capitalization.
“Although recently issued debt will increase financial leverage and deteriorate coverage ratios in the short term, we think the impact is manageable based on the relatively conservative starting financial position with which most Canadian insurance companies entered the pandemic,” the report said.
The report also said that the insurers’ debt issuances allowed them to “improve the maturity profile of their liabilities, which is positive for their liquidity position for the rest of 2020.”
Looking ahead, DBRS said that it expects the smaller insurance companies “to tap the bond market in the remainder of the year, which could bring total issuance up to $8.0 billion in 2020.”