Fitch: Reduced Solvency II Charges Positive for Securitisation

Wed Aug 13, 2014 10:26am EDT

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(The following statement was released by the rating agency) LONDON, August 13 (Fitch) The capital charges under the latest Solvency II proposals have been reduced for high quality but non-AAAsf securitisations. This is positive for the structured finance (SF) market because insurance companies are an important constituent of the investor base. The latest revisions have reduced the capital charges for type 1 securitisation positions rated 'AAsf', 'Asf' and 'BBBsf' by 29%, 46% and 41% respectively. A previous revision to the framework for securitisation investments had already halved the applicable capital charges across the rating spectrum for high quality securitisations to better reflect the types of securitisations European insurers hold and their typical buy and hold strategy. The changes appear targeted at the issuance of securitisations backed by residential mortgages, consumer loans and particularly SME lending from southern European countries that cannot achieve 'AAAsf' ratings and were disproportionately disadvantaged by the previous capital charges. However, the charges may still be considered high by insurers relative to expected losses. Fitch Ratings believes the capital charge for a typical newly issued 'AAsf' rated RMBS tranche with a seven year weighted average maturity would be 21%, while the total loss rate on all European prime RMBS with investment grade (excluding 'AAAsf') ratings is only 1.6%. The charges are designed to protect insurers' balance sheets from market volatility as well as realised losses, and although the eventual loss in these transactions has been small, they did experience depressed prices during the crisis. Falls in market prices of assets can threaten insurers' solvency. The charges on non-type 1 positions, which are in some cases up to 100%, have not been reduced and appear designed to deter insurers from investing in those tranches. Securitisations that do not qualify for the higher quality definition include those backed by commercial real estate loans and non-conforming, self-certified or high loan-to-value ratio residential loans. The latest revisions will bring little benefit to the largest and most active European securitisation markets including those for UK and Dutch RMBS and northern European consumer loan ABS as most of the issuance from those structures is rated 'AAAsf'. Insurers can use an internal capital model to reduce the charges on their assets. However, it is likely that regulators will limit such reductions for securitisation assets, given their caution about the associated risks. Fitch has identified investor confidence as key to the successful operation of European securitisation markets. Capital charge requirements that are not excessive relative to other forms of investment and that are stable over time will be important in establishing investor confidence in securitisation markets. Solvency II is expected to come into effect January 1 2016, although transitional measures mean that the rules may not take full effect until 2032. Contacts Clara Hughes Senior Director Fitch Ratings 30 North Colonnade Canary Wharf London, E14 5GN +44 20 3530 1249 David Prowse Senior Director Insurance +44 20 3530 1250 Andrew Currie Managing Director Structured Finance +44 20 3530 1447 Jeremy Carter Managing Director Fitch Wire +44 20 3530 1391 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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