Insolvency II will not lead to CDO unwinds, predicts Citi

Recently published solvency requirements for European insurers are unlikely to lead to a wave of CDO unwinds, according to recent research by Citi. The report notes that Solvency II will increase the regulatory capital for insurance companies holding structured credit, especially junior and mezzanine positions. But it says that the changes are not big enough to produce a rush to unwind existing holdings.

In addition, many structured credit positions, especially those senior in the capital structure, look more attractive for insurance companies to hold than bonds under the new rules.

Citi adds that, based on analysis of its own CDO sales in 2006 and 2007, European insurers were not a large component of the structured credit market. They played a much less important role as buyers of structured credit than did their US counterparts, and their holdings are dwarfed by those of European banks and asset managers.