US property and casualty (P&C) re/insurance companies are increasingly using low interest rates to extend their debt maturity profiles and replace higher cost debt with lower cost alternatives, according to AM Best.
In a recent report, the rating agency observed that P&C re/insurers with outstanding public debt have begun to focus on longer durations with manageable coupon rates.
The low cost of issuing debt has allowed companies to pre-fund their maturing debt more than a year in advance, in some cases.
Despite the availability of relatively inexpensive capital, AM Best claims that aggregate financial leverage for long-term and short-term debt issuances has plateaued.
Analysts found that the unadjusted debt-to-capital ratio for a group of 44 re/insurers has remained within a narrow range of 22-25% since the beginning of 2013.
In contrast, unadjusted financial leverage spiked to a high of almost 50% during the height of the 2008-2009 financial crisis.
According to AM Best, the total amount of debt outstanding has dropped by approximately 19%, or $42 billion, since year-end 2009, totalling $178.7 billion in 2018.
Many P&C re/insurers continue to lock in lower cost debt due to the uncertain future of interest rates, and most companies with outstanding public debt have maintained a manageable weighted average fixed coupon rate between 4% and 6%.
Ultimately, AM Best believes that P&C re/insurers will be able to fund debt payment obligations from internally generated bottom line profits, event as concerns protectionist trade policies and weak global growth weigh on the US economy.
“P/C (re)insurers have extended their debt maturity profiles in recent years and are employing manageable levels of financial leverage,” the report concluded.
“The resulting financial flexibility should help to insulate the industry from any potential deterioration in balance sheet strength and refinancing risk should the U.S. economy weaken or if interest rates spike unexpectedly.”
