Securitisation: Back in Vogue?

It’s been a decade since securitisation was banished from insurance portfolios in the wake the Global Financial Crisis and the subsequent draconian Solvency II regulation which imposed capital charges most market experts agreed were out of kilter with the risks inherent in the underlying investments.

There is a feeling that asset backed securities (ABS) are making a comeback and a well-attended roundtable hosted by M&G Investments this week explored the opportunities for insurers.

In the United States, the ABS market has almost completely recovered from the post-GFS depression. Europe is proving much slower but the potential is huge. In 2007 there were €2trn of ABS outstanding, now that is down to €400bn.

This shows the scope for recovery is considerable. Insurance investors made up 30% to 40% of the investor base pre-Solvency II but that is now down to under 10% after all bar one major European insurer withdrew from the market between 2010 and 2013.

The wide-ranging discussion focussed on the potential created by the new regulatory landscape, notably the Simple, Transparent and Standardised (STS) securitisation framework that came into force in January. This aims to reverse the course of the first generation of Solvency II regulation by significantly reducing the capital charges on eligible ABS, in particular in those sectors that fund the real economy, such as mortgages and consumer and SME loans.

Supply has clearly ramped up and the potential looks encouraging, particularly given the limited tightening of spreads. For insurers looking to find new ways of diversifying their core fixed income, this certainly holds promise going forward. In the first half of this year there was €11.6bn of STS issuance, comprising 40% of European issuance. Most of this has actually come since April as it took the market a few months to absorb and analyse the new STS regulatory regime.

According to M&G Investments, there could also be at least another €60bn of outstanding paper that could be converted to STS as people realise the potential of the new rules. The big opportunities are to be found in residential mortgages (RMBS), especially in the UK and Holland, and German Auto where returns also look promising.

According to M&G Investments, there are some compelling reasons for insurers to look at ABS afresh as they offer high quality robust assets, a return premium over corporate credit meaningful diversification and attractive returns.

As with so many areas, Brexit casts a slight shadow across this opportunity as you can only come in under the STS regime if you are a European investor. However, the Bank of England is addressing this as it has said it will put in place similar regulations but they will only apply to UK investors. This means some mandates may need to change if Brexit goes ahead. M&G Investments has already beefed up its Luxembourg operation to handle this so that Brexit does not get in the way of exploiting the ABS opportunity.

• In a timely paper entitled ‘Reintroducing securitisations to insurance portfolios’, M&G Investments examines key aspects of the STS framework, recent deals that have come to market, key capital considerations and the available opportunities for insurers to reintroduce high-quality ABS to their investment portfolios.

Download the paper here.