ABS issuers need to be more willing to cater to insurance investors’ needs, and this is almost as important as reforming Solvency II if they are to encourage more insurance money into the market, according to panellists at IMN and Afme's Global ABS conference in Barcelona on Tuesday.
“[Working with us] doesn’t mean going on a date for one night,” panellist Clinton Elliot of Pension Insurance Corporation (PIC) said. “It’s a long term relationship.”
Pension insurers are investing to cover long-term liabilities of up to 50 years and hence need investments that will last that term. As insurers invest over such a long term, they like to take more time to analyse deals than is possible in public securitization deals that are often executed in a matter of days.
Elliot added that ABS jargon could also be off-putting for insurance professionals.
Panellists highlighted that a handful of deals had been carried out with insurers in mind, but said they were far from the norm and often done privately.
Solvency II, which many blame for keeping insurance money out of the securitization market, means insurance funds generally have to invest in products with fixed returns. They also cannot be exposed to prepayment risk, which is common in securitization deals.
“It’s always either the timing or the prepayment risk [which keeps insurers out of deals],” panel moderator Ronan Liston of Citi said.
In many cases insurers wanting exposure to commercial real estate will finance projects directly or own buildings rather than invest in the securitization.
Robert Cannon of Cadwalader, Wickersham & Taft said the most common question he receives from clients is “how can we do this and not have it be a securitization?”.
Marno Jooste — also of PIC — suggested equity release mortgages and ground rents which were a natural fit for both securitization and the type of longer-dated assets that insurers need.
The structure of a securitization could be used to transform the prepayment risk from the equity release mortgages into default risk and hence make deals attractive to insurance investors.
The panel also mentioned whole business securitization and student loan deals as two other places where deals could be attractive to insurers.
Solvency II debate
There are calls for Solvency II to be reformed and the UK has been looking at updating the regulation for the last two years. The next consultation paper is due in September, Liston said.
Panellists said that the EU has set itself against changes. However, one well-placed delegate told GlobalCapital that the EU might consider some reform.
Those UK reforms could allow some investment in highly products with “highly predictable cash flows” panellists said.
The changes may also mean insurers will be less worried about downgrade risk when investing at the triple B level since they might be less heavily penalised for holding sub investment grade paper.
Many in the securitization market hope the reform of Solvency II could be good news for the market. However, according to panellist Ben Grainger of EY, the changes are targeted more at encouraging commercial real estate and infrastructure development than they are at securitization itself.