Funds Congress Highlights

The increased use of rated note fund structures by insurance companies seeking to optimise capital-raising is an example of the insurance sector’s growing interest in customised credit products. Driven by the bifurcation of capital into tranches of rated debt and equity, the popularity of structured credit has grown quickly in the United States and is now attracting interest in Europe. Factors governing success include firms’ capacity for leveraging high-quality data and navigating an evolving regulatory landscape.

Demand for tailored solutions: While assets in the insurance sector are projected to grow to US$42 trillion by 2028, insurance companies are searching for innovative investable asset solutions tailored to their unique balance sheet requirements. Most insurance companies remain underweight in terms of their alternative asset allocations, exposing the sector to volatility risks in both the equity and bond markets. Tailored investment products that align with insurance firms’ solvency and balance sheet requirements can help mitigate these risks.

Unlocking diversification: Structured credit products also offer stable, recurring cashflow, which can play a useful role in funding base diversification. With their longer-duration liabilities and stable capital, insurance companies are often able to trade liquidity for some excess spread, which unlocks potential for various forms of fund finance, including credit, opportunistic or real estate funds, which offer attractive pickups relative to corporate bonds or other liquid instruments.

The role of regulations: Regulatory frameworks such as the EU’s Solvency II framework, the UK’s Matching Adjustment mechanism and the state-level regulations prevalent in the United States play a crucial role in shaping development of structured credit investment strategies and products. The retention requirements wrapped up in Europe’s securitisation regulations, for instance, can significantly impact investor decisions. For market newcomers, teaming up with knowledgeable partners may be the smartest way to gain the understanding of multi-jurisdiction regulatory environments needed to develop bespoke solutions. 

Importance of data: Investment firms considering opening dialogue with insurance companies should think through the importance data before they commence. For European and UK insurers, to stay ahead of volatility and counterparty risk and gain early warning of liquidity mismatches, insurance companies may need detailed, granular reporting on a monthly basis of valuations at the underlying security level. Securing reliable ratings from rating agencies will be crucial for success; those investment firms that succeed in mastering that data challenge will fare far better in unlocking capital in the insurance or non-bank lending sector. 

Coexistence with bank lending: Traditional bank lending will continue as a primary funding source, of course, particularly where short-term solutions are needed. As regulations evolve and new products develop, the ability of structured credit to offer an array of longer-term, stable financing options suggests the sector will form a useful funding source for SME, infrastructure or institutional lending in helping finance the real economy.