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Trends – Institutional Monthly
Convertible bonds under Solvency II 


Under Solvency II, the insurance regulation entering into force across the EU in January 2016, capital charges on equities are massive. Convertible bonds are an interesting option to optimize allocations under this new regulatory framework. 

Trends – Institutional Monthly

The implementation of Solvency II, the regulatory framework for European insurance companies, is in a final stage. The regulation is based on three pillars: quantitative capital requirements, governance/supervision and disclosure/reporting. From an asset manager's perspective, the implications of pillar 1 and 3 are most relevant. Pillar 1 defines the rules for calculating Solvency Capital Requirement, the so-called SCR, which is the required capital that has to be met by the company's own funds (assets minus liabilities) under an economic balance sheet view. For asset managers, the rules of calculating SCR become relevant when it comes to capital-efficient allocation of assets – this will be discussed in more detail below. Pillar 3 aims to increase the level of transparency by public disclosure and regulatory reporting requirements. Insurance companies are required to apply a transparent risk reporting of collective investments,! which is often passed on to fund managers who are starting to realize that providing regulatory reporting as an early mover may pose a clear advantage in the competitive fund market.

Asset managers who want to go further in serving the needs of the insurance sector will have to go beyond providing Solvency II reporting: in areas not covered by insurers' asset management departments, the combination of traditional asset managers' know-how with Solvency II efficient capital allocation can impose clear added value to the insurance sector. We believe that the convertible bond segment is likely to be one of them. The attractiveness of this asset class is apparent when looking closer at the SCR rules finally set out in the Official Journal of the European Union on 17 January 2015, known as Commission Delegated Regulation 2015/35.  

In this issue:

• Investment strategy and asset allocation: Equities remain our preferred assets

• Alternative ideas: UK election outcome likely to be positive for real estate markets

• Food for thought: Market risk factors to start monitoring

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