Fitch Ratings anticipates increased interest and activity in securitised assets from insurers following the matching adjustment (MA) reform. However, they do not expect significant changes in MA portfolios or insurers’ credit quality.
The new MA regulation is expected to encourage internal asset securitisation within insurers, allowing them to optimise their matching adjustment portfolios.
We expect the new MA regulation to support insurers’ internal asset securitisation activity, facilitating variety in securitisation usage by insurers pursuing optimisation in portfolios to achieve either a higher MA benefit or a better rating mix to reduce required capital.
However, the overall impact of the reform for the insurers and its implications for the securitisation asset market is yet to be seen.
While securitised assets with highly predictable cash flows may offer limited matching adjustment benefits, risks like prepayment and other factors must be accounted for in the fundamental spread, which may reduce the benefit.
Additionally, incorporating new assets into MA portfolios post-reform will likely introduce added costs related to risk management, reporting, governance, asset sourcing, and modelling, along with securing matching adjustment approval from the Prudential Regulation Authority (PRA).
Fitch views MA-eligible rated obligations as having high event of default (EoD) risk, making liquidity provisions essential under Structured Finance Rating Criteria.
Unlike typical publicly rated securitisations, where only interest payments are required on a timely basis, MA-eligible obligations often include both interest and principal in periodic payments.
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