Is it wiser to opt for bond refinancing and wait it out?
Pessimism is a horrible thing, but that's precisely the mindset of the power players in the insurance industry at the moment.
Sitting in at the Insurance Times Global Leaders Forum, I was struck by the tough road ahead for the insurance industry. Willis president Grahame Millwater said the megabroker was braced for rates scrapping around the bottom for the next two years.
Eamonn Flanagan, director at Shore Capital Stockbrokers, believes some of the smaller insurers face a squeeze on capital ahead of Solvency II in 2012.
Most striking for me, however, was the views of Lloyds TSB Corporate Market's head of insurance, Bill Cooper. He said the whole corporate world, including insurance, would feel pressure from banks seeking refinancing on loans handed out during the boom years.
UK banks face a $1.2 trillion (£754bn) refinancing splurge by the end of 2012, according to a recent Bank of England Financial Stability report. Cooper said that pressure would fall on private equity and, in turn, the companies they have backed. Hence why there should be a wave of flotation, trade sales or mergers and acquisitions in the insurance sector by 2012.
But my gut feeling is that 2012 is going to be a tough time to divest, as the insurance industry is so tightly bound to the wider economic environment. With banks hoarding cash in the face of tighter capital requirements, such as Basel III, and also in order to buffer against defaults and loan rollovers, credit-restricted business face growth curbs. Throw in the impact of government austerity measures and lower household consumption, and it’s possible the economy faces years of slow growth or even a double-dip recession.
And let's not even go into Eurozone sovereign debt and unrealised European banking writedowns, which are likely to erode investor confidence further. It’s a grim environment and probably not one to start divesting in.
So why not opt for bond refinancing and wait a few years for the market to pick up? Cooper said the markets are "hot" at the moment and have an appetite for corporate bonds, emanating from insurance, that offer a stable return. The maturity could end as far away as 2017 and 2018.
Perhaps Cooper was waving the flag for his bank, which has expertise in this area, but even so, he was nonetheless convincing. Bond refinancing could well be the lifeboat in the storm.
Saxon East, assistant editor, news, Insurance Times
