Following COVID-19 years when insurers issued record levels of debt in 2020 and 2021 to build up liquidity buffers and to finance new acquisitions, debt issuances in 2023 continued a downward trend, according to a new note from Morningstar DBRS, entitled Canadian Insurers See Lower Debt Issuance in 2023, But Outlook Remains Broadly Stable for 2024.
Still well above pre-pandemic levels
They add that Canadian insurance debt issuances still remain well above pre-pandemic levels but say debt issuance activity is unlikely to return to 2020 and 2021 levels in the medium term, unless significant players get involved in substantial mergers and acquisitions activity. “We expect that debt issuance levels will fluctuate between $3 and $6-billion annually for the next two to three years, depending on the Canadian insurance industry’s acquisition activity and refinancing needs,” they write.
Most Canadian insurers postponed non-essential issuances in 2023, they add, because of the rising cost of new debt.
More in line with the historical averages
“The average coupon for insurance debt issuances slightly increased to 5.728 per cent in 2023, from 5.232 per cent in 2022,” they write. “We note the increase in coupons despite the average tenor of new Canadian insurance debt having dropped to 16 years in 2023 from 21 years in the previous year. The tenor of insurance debt issued in 2023 is more in line with the historical averages seen in the market before the pandemic.” They conclude saying a significant reduction in interest rates could favour debt issuances with longer tenors, “but this scenario is not likely in the short term,” they state.
