Following the recent downgrades [7] of many of the major European banks and insurers and last year's comments by Fitch [8] on insurers' inability to pass on losses to policyholders, the hot-topic of ASSGEN, ALZ, and the rest of the capital-impaired forced-soakers-up-of-new-issue-demand in the European insurance market are under new pressure as The WSJ [9] points out today that new 'rightly punitive' capital rules have been watered down. The 2014 introduction of 'Solvency II' - the insurers' equivalent to banks' Basel III capital rules - did indeed attempt to create risk-weighted capital requirements and better balance assets and liabilities within these firms. However, as Hester Plumridge notes, regulators bowed to industry pressure (again) adding the ability to shift discount rates to get around low-rate-implied valuations for their annuity streams and the introduction of a 'countercyclical premium' to avoid the growing (and negative) spread between distressed assets and rising liabilities. As Plumridge concludes, "a solvency regime that ignores all European sovereign credit risk looks increasingly unrealistic. Investors could end up none the wiser." After some systemic compression, the last week or so has seen insurers start to deteriorate as perhaps the market will enforce its own capital expectations even if regulators are unwilling to.
[10]
Chart shows the spread (lower pane) between ASSGEN 5Y CDS and the Senior Financial 5Y CDS. Insurers also remain extremely highly correlated (and dependent) with XOver (or high yield credit).
The market started to price in the extra REAL risk in Insurers but the recent 'asset reflation' has lifted all boats and compressed that risk premium. It seems clear that while insurers have had their fair share of 'help' from regulators with these ridiculous capital 'adjustments', they will always lag the kind of explicit support the banking sector seems to have and so an Insurer - Senior Financial decompression trade seems like a low cost long vol play on further stress in Europe as the market will enforce its own capital expectations even if the regulators will not.
Chart: Bloomberg