Solvency II: Opening New Securitization Lanes for Insurers

Deanna Leighton, CFA | Head of Allocation & Strategy—Insurance
Gerry Anderson | Insurance Solutions Specialist

Revamped insurance regulations could bring securitized investments back into play.

The 2025 draft from the European Commission (EC) weighs in on wide-ranging aspects of insurance investing rules. Areas covered include volatility adjustment, equity investments, interest-rate risk, and proportionality and simplifications.

The EC has lofty goals in mind with the sweeping changes, which are expected to become final in January 2027. The new framework is intended to better enable the insurance sector to support Europe’s real economy, the green and digital transitions, and other European Union (EU) priorities while keeping the industry prudentially sound and financially stable.

One area that may be underappreciated could actually have a far-reaching impact on insurers’ investments: more favorable capital treatment for securitizations.

Sharply Lower Capital Requirements for Securitizations
With a major recalibration of capital charges for securitizations, issues that are STS (simple, transparent and standardized) may now be treated more in line with covered bonds, reducing their capital requirement. But in our view, the draft rules would have a much bigger impact in the non-STS securitized space.

Under existing rules, non-STS securitizations face stiffer capital charges—intended to ensure strong capital positions in the wake of the global financial crisis. The rules strongly discouraged insurers from securitized investments, closing off a major avenue of opportunity for diversification and yield. Despite subsequent advances in securitization transparency, and governance, insurers still have negligible exposure.

The proposed new rules for non-STS securitizations are a pronounced change:

• They establish a separate capital charge curve for senior tranches, which have much less credit risk than subordinated layers—especially senior tranches backed by high-quality collateral.
• Even mezzanine or junior tranches should see a more risk-sensitive treatment, with calibration changes that better reflect actual credit behavior under stress scenarios.
• There would be greater distinctions among stress factors, based on credit-quality steps (Display) and modified duration, a more granular approach than exists today.
• The senior-to-non-senior capital-requirement ratio would better mirror the hierarchy in the Capital Requirements Regulation and Capital Requirements Directive framework for banks, helping reduce cross-sector arbitrage.

New Capital Charges Will Include Greater Distinctions
Securitization Base Capital Formula by Credit Rating (Percent)

Image

Current estimates do not guarantee future results.
STS: simple, transparent and standardized
Base capital formula is the lesser of 100% or duration multiplied by factor.
As of August 12, 2025
Source: European Commission and AllianceBernstein (AB)

Case Study: A Closer Look at the Security-Level Impact
To get a better sense of the impact on the attractiveness of securitizations under the proposed new Solvency II rules, we can compare the potential returns (net of capital) of a few examples of collateralized loan obligations (CLOs) (Display).

Assessing the Impact of New Capital Charges
Potential Returns (Net of Capital)

Image

Current analysis does not guarantee future results.
The collateralized loan obligation (CLO) capital charge is based on weighted average life. Capital impact is calculated as solvency capital requirement (SCR) × cost of capital × target solvency capital ratio × (1 minus diversification benefit). Assumes a cost of capital of 4.75%, target SCR ratio of 150% and diversification benefit of 25%. Net spread is calculated as spread minus expected losses minus capital impact.
As of August 12, 2025
Source: European Insurance and Occupational Pensions Authority and AB

While mezzanine tranches of non-STS securitizations with longer weighted average lives still face very punitive capital charges, capital charges on senior-tranche AAA rated CLOs would be slashed to 17%. As a result, the net spread for these types of securities would improve from –291 basis points to 40 basis points (Display), which could lead Standard Formula investors to include senior CLOs as viable complements to existing corporate exposures.

Senior CLOs Could Be Viable Complements to Corporate Bonds
Potential Returns (Net of Capital, Basis Points)

Image

Current analysis does not guarantee future results.
The collateralized loan obligation (CLO) capital charge is based on weighted average life. Capital impact is calculated as solvency capital requirement (SCR) × cost of capital × target solvency capital ratio × (1 minus diversification benefit). Assumes a cost of capital of 4.75%, target SCR ratio of 150% and diversification benefit of 25%. Net spread is calculated as spread minus expected losses minus capital impact. USIG: US investment grade.
As of August 12, 2025
Source: European Insurance and Occupational Pensions Authority and AB

Bringing Securitizations Back into Play 
We believe that the dramatic overhaul of non-STS charges could bring a big share of the securitized market back into play for insurance investors—and open new lanes for strategic allocations to securitized assets.

That means newfound access to higher-yielding credit: an oasis for an industry struggling to meet yield targets in a world of sticky inflation, tight credit spreads and modest returns on public credit. It also means a diverse range of asset types and risk/return profiles: from consumer loans to auto asset-backed securities and from commercial mortgage-backed securities to CLOs. And it doesn’t require a duration mismatch or shift into lower-rated credits.

The new framework also enables insurance investors to reestablish a presence in market segments poised for future growth. Banks continue to pull back under the weight of tighter Basel III/IV capital requirements, offloading credit risk through securitization, especially with loans to small-to-medium enterprises and consumers. With insurers’ long-term liabilities, they’re natural buyers.

The renewed interest could narrow the gap between European and US securitized allocations. Fitch reported in March 2025 that nearly 15% of US life insurers’ assets were invested in securitized products, versus 3% for EU life insurers, as per Autonomous. Will we see Europe’s insurance asset allocations shift to a more US-style mix over time?

Looking at the Big Picture
Ultimately, the EC’s 2025 reforms to Solvency II are intended to revive Europe’s securitization market, helping channel capital to households and small-to-medium enterprises in the European economy and supporting other long-term EU goals. Standard Formula insurers are positioned to benefit as natural securitized asset buyers—and will likely reshape their portfolio allocations.

But key regulatory elements may be unchanged. Investments must still satisfy due diligence, transparency and credit-granting criteria, and re-securitizations still face stricter treatment. Risk-retention requirements, often seen as a barrier to originators and investors (particularly those with US assets), remain. This will likely rule out much of the US securitized universe, though a fair share of US public securitizations—25%, as per KANERAI—comply with EU risk-retention requirements.

For European insurers, the regulatory overhaul is an opportunity to reshape asset mixes, enhancing return potential and diversification with investments aligned with their long-term liabilities. For insurers seeking to take advantage, it’s a good time to start reassessing governance, analytics and risk controls.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Deanna Leighton, CFA

Deanna Leighton is a Senior Vice President and Head of Allocation & Strategy for AB’s Insurance team. She is responsible for formulating insurance portfolio allocation strategies, overseeing daily portfolio-management activities and leading insurance-specific cross-sector, relative-value discussions. Leighton interfaces with AB Insurance’s strategic clients in building tailored liability-driven and asset-focused solutions. She is a frequent speaker at industry conferences and moderated the inaugural Private Credit panel at ABS East in 2023. Prior to joining AB in 2022, Leighton was a fixed-income portfolio manager at AIG Asset Management, where she oversaw around US$5 billion of high-yield bond investments and helped build AIG’s third-party asset-management business. Before this role, she was an associate portfolio manager for AIG Asset Management’s high-yield bond portfolio. Leighton holds a BA with a concentration in economics from the University of Michigan and is a CFA charterholder. Location: New York

Gerry Anderson

Gerry Anderson is a Vice President and Insurance Solutions Specialist on AB’s EMEA and APAC Insurance Solutions team. He is responsible for supporting product development and the development of technical solutions to best meet the needs of AB’s insurance clients. Anderson is also a regular contributor to the firm’s market-insight and thought-leadership pieces. Prior to joining AB in 2024, he was an associate director at WTW, a senior consultant at Hymans Robertson and an actuarial analyst at M&G. Anderson holds a BSc (with honors) in mathematics from the University of St Andrews, Scotland. He is a qualified actuary and Fellow of the Institute of Actuaries (FIA) and has attained the Certified Enterprise Risk Actuary (CERA) designation. Location: London