Fitch Reports Insurance CDOs Allow Smaller U.S. Insurers to Access Capital Markets

Insurance collateralized debt obligations (CDOs) present a significant new opportunity for small to mid-sized insurers to raise long-term capital at rates far lower than current financing, according to an article appearing in the latest edition of the Fitch Ratings ‘Global CDO Quarterly’ newsletter.

With four separate offerings completed within the last year raising a total of $1.5 billion in new capital and several more expected in the next 12 months, Fitch expects that development of insurance CDOs will significantly affect the U.S. insurance market and brighten prospects for smaller companies.

“There has been considerable interest among investment banks and insurers to create more insurance CDOs in the near-term,” said Sajjad Hussain, director, Fitch Ratings. “Insurance CDOs have created a new opportunity for smaller insurers and mutual companies that were unable to tap the public debt market in the past and had to rely on more restrictive and costlier bank debt to raise capital.”

Fitch will unveil changes to its insurance and bank CDO criteria in a report scheduled to be released later this year.

Currently, Fitch has altered its credit analysis of prospective insurers, utilizing a credit scoring model similar to the one used in its bank trust preferred CDO rating process to measure factors such as credit exposures to re-insurers, profitability, and capital and reserve adequacy.