European investors see Solvency II hurting corporate debt

Fitch Ratings' latest quarterly European fixed income investor survey, spoke to managers of an estimated $4trn of fixed income assets.

"Nearly half of respondents (46%) expect the consequences of forthcoming insurance regulatory changes on the demand for long-term fixed income assets issued by corporates to be negative," said Monica Insoll, managing director in Fitch's credit market research group. "A similar proportion (42%) thought there would be no real impact and 12% believed Solvency II would be a positive for the asset class."

The response was broadly similar to that received in the Q310 survey, when 44% of respondents said corporates would be negatively affected. Solvency II, a new regulatory framework for European insurers, is due to come into force on 1 January 2013.

In the Q211 survey, respondents were also asked about the impact on sovereign debt. On this topic, investors were more optimistic. Responses were evenly split, with 28% anticipating positive and negative impacts respectively.

"Solvency II brings in explicit capital charges on assets for all European insurers for the first time," said Clara Hughes, director in Fitch's EMEA insurance rating team. "European Economic Area sovereign debt is currently proposed as one of the few asset classes to be exempt from direct charges."

"The regulations will require insurers to consider short-term risk in the form of a one year value at risk. This is a completely new perspective for many insurers that have been accustomed to a buy and hold philosophy," added Aymeric Poizot, head of Fitch's EMEA fund and asset manager rating group. "For example, from a Solvency II standpoint, high grade long-term corporate credit is no longer a low risk carry investment and could be less favoured. Consequently products providing long-term guarantees that were profitable under Solvency I may no longer be viable under Solvency II."