Canadian insurance companies have issued debt and preferred shares in record numbers during 2020, which will help them manage the tougher economy ahead, said DBRS Morningstar in a report on Tuesday.
Canadian insurers issued more than $9.5 billion in debentures and preferred shares so far this year, about five times the amount issued in 2019, the rating agency said.
Since the agency’s initial research on Canadian insurance debt in May 2020, insurers issued $2.9 billion in senior debentures.
The weighted-average issuance interest rate and maturity for senior and subordinated debentures issued was 2.813% and 16.4 years, respectively. This reflected the declining trend in corporate bond spreads after late April and investors’ demand for less risk, the report said.
The tighter corporate bond spreads and insurers’ strong financial performance in the second quarter allowed insurance companies to issue at a lower cost compared with the start of the pandemic.
DBRS said it viewed moderate bond issuance as an important tool to improve insurers’ liquidity and navigate the economic lockdown’s impact.
“[T]hese debt issuances have allowed insurance companies to improve the maturity profile of their liabilities, which is positive for their liquidity position,” DBRS said.
And, because Canadian regulations generally count debt issued at the holding-company level with maturities of longer than five years as Tier 2 capital, the issuance strengthens regulatory capital ratios, it said.
The rating agency expects smaller insurance companies will tap the bond market in the remainder of the year, which could bring total issuance to well over $10 billion.