Solvency II Revisited: Unlocking CLO Investments for European Insurers

In June-July 2025, the European Commission published a long-anticipated package of measures aimed at reviving the European securitization market.1 When enacted, these measures will reduce and harmonize the risk-based capital requirements for insurers’ and banks’ investments in securitizations, as well as simplify the disclosure requirements and broaden the risk retention requirements for securitization originators.

For EU insurers operating under the Solvency II standard formula, the reform brings a significant improvement in the regulatory capital efficiency of investments in senior tranches of securitizations. Senior tranches of non-STS (simple, transparent, and standardized) securitizations, such as collateralized loan obligations (CLOs), emerge as the biggest winner. For example, the spread risk capital requirement for a AAA rated CLO tranche with a three-year modified duration will fall from 37.5% (broadly in line with the equity risk charge for listed equities) to 8.1% (broadly in line with typical spread risk charges for BBB rated corporate debt).

Since the early days of Solvency II, prohibitive capital charges have effectively barred most European insurers from making meaningful allocations to securitized credit. European insurance industry aggregate allocations to collateralized securities – including asset-backed securities (ABS), mortgage-backed securities (MBS), and CLOs, among others – make up only about 1% of total investments.2 This is in comparison to 15% for insurers in the US3 and 17% in Bermuda.4 The regulatory shift creates an opportunity for European insurers to narrow the gap with their global peers and build better-diversified, higher-yielding portfolios by re-engaging with high-quality securitized credit across public and private markets.

Here, we summarize the proposed changes and quantify the reform’s impact on the capital efficiency of insurers’ investments in CLO tranches.

What are the new capital requirements for insurers’ investments in securitizations?

The Solvency II standard formula currently distinguishes between STS securitizations and non-STS securitizations.5 Spread risk capital charges vary significantly by tranche seniority (for STS securitizations), modified duration, and rating.

The senior-most tranches of STS securitizations benefit from relatively modest spread risk charges, typically ranging from 1.10 to 1.25 times those applied to comparable corporate debt exposures. In contrast, non-senior investment grade STS tranches incur significantly higher charges – up to three times those applied to comparable corporate debt. Non-STS securitizations, regardless of tranche seniority, incur steep capital charges of up to 100%.

The narrow definition of an STS securitization means that only a small proportion of securitizations qualify as STS-compliant (see the Key Terms Glossary below). The remainder bear punitive capital charges under the standard formula, which are sharply at odds with the historical performance of securitized credit in the post-global financial crisis landscape. Combined with risk retention requirements for securitization originators, this has effectively prevented most insurers from making meaningful allocations to the asset class.

The reform aims to remove some of these obstacles by recalibrating spread risk capital requirements and reducing capital charges across all securitization types.6 The most significant relief is expected for senior tranches of non-STS securitizations.

For STS securitizations, spread risk charges will fall by a factor between 0.7 and 0.9, bringing their treatment closer to that of high-quality corporate debt and covered bonds. For example, an AAA rated ABS tranche (classified as a senior STS securitization) will carry a capital charge comparable to that of a covered bond and below that of a same-rated corporate bond or loan.

Crucially, the revised framework introduces differentiation within non-STS securitizations based on tranche seniority. An AAA rated CLO tranche (classified as a senior non-STS securitization) will be treated broadly on par with a BBB rated corporate debt exposure – a significant enhancement to the current regime.

Solvency II Standard Formula Spread Risk Capital Requirements for Securitization Positions: Current and Proposed Regime

Source: PineBridge Investments interpretation of European Commission (19 July 2025) Draft Delegated Regulation amending Delegated Regulation (EU) 2015/35 on Solvency II (Ref. Ares(2025)5843909 - 17/07/2025), European Commission (16 November 2024) Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Document 02015R0035-20241114).

Solvency II Standard Formula Spread Risk Capital Requirements for Securitization Positions: Current and Proposed Regime

Source: PineBridge Investments interpretation of European Commission (19 July 2025) Draft Delegated Regulation amending Delegated Regulation (EU) 2015/35 on Solvency II (Ref. Ares(2025)5843909 - 17/07/2025), European Commission (16 November 2024) Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Document 02015R0035-20241114).

How will the reform impact the relative value of CLO tranche investments for insurers?

The new regulations will lower capital requirements, thereby improving the return on regulatory capital for insurers’ investments in securitizations, particularly for AAA rated CLO tranches. Our analysis of current market spreads and expected capital requirements suggests that lower capital requirements, coupled with spread pick-up over comparable corporate bonds, will make AAA CLOs an attractive addition to insurers’ fixed income portfolios.

Historically, CLO tranches have offered investors an attractive risk-return profile, rewarding them for taking on complexity rather than default risk. On average, from 1993 to 2024, the five-year cumulative loss rate for CLO tranches rated investment grade at origination was 4 bps (compared to 78 bps for speculative grade tranches),7 whereas the comparable long-term average for investment grade corporate bonds was over 50 bps.8 The floating-rate coupon also means that CLO tranches can diversify insurers’ portfolios, which largely comprise longer-dated fixed rate bonds. This can be particularly beneficial in periods of elevated interest rate volatility, such as during the post-Covid tightening of 2022-2023.9

Although regulatory capital efficiency is a significant consideration for insurance investors, it is by no means the only driver of an insurer’s investment strategy. Partnering with a specialized asset manager that combines an active approach to security selection and portfolio management with a comprehensive understanding of the insurance balance sheet and the ever-changing regulatory landscape can help insurers unlock the benefits of securitization investments -- as well as to meet the prudent person principle requirement that insurers invest only in assets whose risks they can adequately identify, measure, monitor, manage, control, and report.

We believe the EU reforms will help unlock a compelling market for European insurers looking to build better-diversified, higher-yielding fixed income portfolios.

Key Terms Glossary: Securitization Investments Under Solvency II

Risk retention requirement

The originator, sponsor, or original lender must retain at least 5% of the net economic interest in the securitization on an ongoing basis using one of the following retention methods:

• Vertical slice: Retain 5% of the nominal value of each tranche sold to investors

• Originator’s interest: Retain 5% of the nominal value of each securitized exposure (common in revolving structures)

• Random selection: Retain 5% of randomly selected exposures, provided they are not sold to third parties

• First loss tranche: Retain 5% of the first-loss piece

• Combination: A mix of the above, as long as the total equals 5%

The retained interest cannot be hedged or sold.

EU insurers are prohibited from investing in securitizations that do not meet the risk retention requirements.

The Solvency II reform proposes waiving risk retention for securitizations where the first-loss tranche represents at least 15% of the nominal value of the securitized exposures and is held (or guaranteed) by a narrowly defined list of public entities.10

Securitization

In the Solvency II context, securitization is a transaction or scheme characterized by:

• Tranching: The credit risk is split into different levels (tranches) with varying seniority

• Subordination: Losses are absorbed in order of tranche seniority, with junior tranches absorbing losses first

• Performance-based payments: Investor returns depend on the cash flows from the underlying asset (e.g., a commercial real estate loan) or pool of assets (e.g., consumer loans, trade receivables)

Senior securitization position

A senior tranche is the highest-ranking tranche in the securitization structure. It is not subordinated to any other tranche in terms of credit risk and is protected by credit enhancement from junior tranches.

Simple, transparent, and standardized (STS) securitization

Simple:

• The securitization must involve true sale of assets

• The underlying exposures must be homogeneous and standardized (e.g., residential mortgages, auto loans); no re-securitizations

Transparent:

• Investors must receive sufficient information on the underlying assets, cash flows, and structure

• Investors must receive regular reporting based on standardized templates

Standardized:

• The structure must follow standard risk retention, servicing, and documentation practices

• There must be clear rules on allocation of cash flows and operation of triggers