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.

To read the full document follow this link. Please note that a CreditSights account is necessary to access the report.

BanksInsurers
Frequent issuers of debt for funding and regulatory purposes, leading to active bond marketsMuted levels of issuance, so a less dynamic bond market
Sovereign risk and government backing influences bank bondsFactors 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 sectorInvestment 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 volatilityAssessment 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 returnsBonds are measured based on excess returns
New issues tend to come with a new issue premium to attract buyersNew 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 requirementsInsurance 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
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