A market valuation primer for banks and insurance
GICP Expert View / 6 December, 2023
"Euro Banks & Insurance: Market Valuation Primer" from CreditSights provides an in-depth look into the valuation and pricing of bank and insurance bonds.
Here we highlight some of the differences in the credit markets across the two sectors.
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| Banks | Insurers |
|---|---|
| Frequent issuers of debt for funding and regulatory purposes, leading to active bond markets | Muted levels of issuance, so a less dynamic bond market |
| Sovereign risk and government backing influences bank bonds | Factors such as supply expectations, bond structures, correlations with other asset classes, and credit ratings all influence the pricing of insurance bonds. |
| Investment views are made in the context of expected performance versus the wider banking universe index, eg other outstanding bonds or similar peers in the sector | Investment views are made in the context of expected performance versus the wider insurance universe index, eg comparable securities from the same issuer or other comparable issuers |
| Assessment is based on fundamental credit analysis and macro themes such as the operating environments, M&A potential, monetary policy, regulation, market volatility | Assessment is based on fundamental credit analysis and macro themes such as supply expectations, extension risk and probability of call, the operating environments, bond structures, market volatility |
| Bonds are measured based on excess returns | Bonds are measured based on excess returns |
| New issues tend to come with a new issue premium to attract buyers | New issues tend to come with a new issue premium to attract buyers |
| Insurance spreads tend to follow bank spreads | |
| Investors price in rating risk to a greater degree for insurers compared to banks | |
| Insurers focus on delivering shareholder returns, so are unlikely to risk a rating downgrade in order to pay a dividend | |
| Banks’ valuations are significantly influenced by their funding and capital structures which reflect specific regulatory requirements | Insurance companies' debt layers play a pivotal role in their credit assessment. |
| The regulatory treatment of regulatory credit reduction in the final years of the instrument can impact a bank’s calling policy or create an incentive for banks to call their bonds |