New Solvency II proposal bodes well for ABS capital charges for insurance companies
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Article Type
Insights
Topics
Solutions, Alternative Fixed Income
Published
December 08, 2025
Read time
9 mins
Authors
Maarten Jan Hoefnagel
Balint Vágvölgyi
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In this paper we will take a closer look at the most important changes for Solvency II relating to Asset Backed Securities (ABS) proposed by the European Commission. We start with a short history of Solvency II, then we summarize the highlights of the proposal and the effect on capital charges and return on capital (RoC) for insurance companies. Last but not least, we propose a few ABS model portfolios which could work well for insurance companies under the new proposal and compare them to the corporate credit sector.

 

A brief history of Solvency II regulation and its impact on ABS 

 

Solvency II is a set of regulations for European insurers which came into force in 2012. The calibration of Solvency II was very punitive for ABS in terms of capital charges. Insurance companies were effectively locked out of the market because the RoC was no longer attractive, shaking out in the very low single digits. There were a few exceptions. Some larger insurance companies used their own internal model to determine capital charges for ABS. However, these capital charges were not allowed to deviate too much from the Solvency II standard model. 

 

As a result, the percentage of insurance companies invested in ABS dropped substantially in Europe. To give an idea, the larger insurance companies have about 2-3% of their AuM currently invested in ABS, and for smaller insurers, this figure is below 1%. This is quite different across the Atlantic. In the US, where much lower National Association of Insurance Commissioners (NAIC) capital charges apply, insurance companies account for instance for the largest holders of CLOs, a subsector of the ABS market, owning between 25 - 30% of the US CLO market.  

 

Throughout the years, there have been several adjustments to the harsh capital charges, particularly due to the lobbying and pressure efforts of ABS industry participants, such as issuers and asset managers. The first amendment was the type 1 and type 2 ABS distinction in 2014, with the higher quality (prime) transactions of type 1 attracting lower charges. Type 2 transactions mainly consisted of the higher beta sectors CLOs, CMBS and non-standard RMBS. The capital charges for type 2 remained unchanged and overly punitive. In 2019, the favorable treatment of type 1 ABS evolved into STS labeled (Simple Transparent and Standardized) ABS and type 2 became effectively all the other non-STS ABS. At the same time, the capital charges for STS ABS (formerly type 1) were adjusted downwards. Again, non-STS ABS capital charges were maintained at elevated levels.

 

New proposals vs. the current situation

 

In the following tables we find the newly proposed capital charges for bonds from the different rating categories compared to the current situation. The first table relates to STS ABS and the second table shows the comparison for all other (i.e. non-STS) ABS. In the first two columns of each table we find the capital charge per year of spread duration. In the columns thereafter we state the capital charge for a representative bond from each category as well as its current market spread above Euribor. These figures allow us to make a comparison of the RoC of this bond for an insurance company for the current and proposed situation. We calculate the RoC by dividing the spread by the capital charge. Hereby we assume that the funding cost of the insurance company is equal to Euribor.  

 

Please note that in the tables we make the comparison for senior bonds with AAA and AA as well as mezzanine/junior bonds with rating AA, A, BBB, BB and B. Senior bonds with a rating of below AA and mezzanine bonds with a rating of AAA are not included because these are a very small part of the ABS market.

 

Rating / seniority Capital charge per year of spread duration Capital charge representative 3y bond Market spread representative bond (bps) Return on Capital
  Current Proposed Current Proposed   Current Proposed
AAA 1.0%  0.7% 3.0% 2.1% 60 20.0% 28.6%
AA senior 1.2% 0.9% 3.6% 2.7% 75 20.8% 27.8%
AA mezzanine 3.4% 2.6% 10.2% 7.8% 95 9.3% 12.2%
A 4.6% 4.0% 13.8% 12.0% 130 9.4% 10.8%
BBB 7.9% 7.1% 23.7% 21.3% 160 6.8% 7.5%
BB 15.8% 12.7% 47.4% 38.1% 280 5.9% 7.3%
B 26.7% 21.3% 80.1% 63.9% 390 4.9% 6.1%


Table 1. Solvency II changes for STS ABS. Source: Aegon Asset Management as of September 30, 2025. RoC has been calculated assuming funding costs are equal to 3M Euribor.

 

 

Rating / seniority Capital charge per year of spread duration   Capital charge representative 5y bond (4y for AAA)   Market spread representative bond (bps) Return on Capital
  Current Proposed Current Proposed   Current Proposed
AAA 12.5% 2.7% 62.5% 10.8% 130 2.1% 12.0%
AA mezzanine 13.4% 9.0% 67.0% 45.0% 185 2.8% 4.1%
A 16.6% 12.0% 83.0% 60.0% 215 2.6% 3.6%
BBB 19.7% 18.8% 98.5% 94.0% 300 3.0% 3.2%
BB 82.0% 38.9% 100.0% 100.0% 510 5.1% 5.1%
B 100% 63.8% 100.0% 100.0% 820 8.2% 8.2%

 

Table 2. Solvency II changes for non-STS ABS. Source: Aegon Asset Management as of September 30, 2025. RoC has been calculated assuming funding costs are equal to 3M Euribor

 

With regard to STS ABS we see the largest decrease in capital charges for the AAA and AA senior bonds. These are about 30% lower. This also translates into quite an improvement in RoC. Both categories now have a RoC of almost 30%. This compares quite favorably with the RoC for mezzanine bonds. These figures increased as well, albeit only marginally. AA mezzanine bonds perhaps being the exception.

 

If we then take a look at the non-STS ABS figures in Table 2, we see a similar picture. Here also the largest improvement in capital charges is for the senior AAA bonds. These are about 80% lower, increasing the RoC almost sixfold. While the decreases in the capital charges for mezzanine bonds are meaningful – with exception of BBB mezzanine – the improvements in RoC are only marginal or even non-existent as is the case for sub-investment grade mezzanine.

 

What does this all mean for the “optimal” ABS portfolio for an insurance company?

 

The answer to this question is: it depends. If a high RoC is the most important consideration for an insurance company then a diversified portfolio of senior AAA and senior AA STS ABS is most suitable. A diversified portfolio would have the following characteristics.

 

Key characteristics

 

  • Senior AAA/AA rated STS ABS portfolio, well diversified in terms of country and collateral  
  • Spread over swaps: +0.7% (EUR); Yield: +2.9% (EUR)
  • Weighted average life: 3.2yrs;
  • Modified duration: 0.25 years (100% floating rate notes)
  • Solvency II Capital charge: 2.3%; Return on Capital (EUR)*: 29.7%
  • EUR and GBP denominated bonds (hedged to preferred base currency)
  • ESG score is ~2 on a scale of 1 to 5

 

However, if a high RoC is not the only figure that matters to an insurance company but a higher spread would also be desirable, then one could think of adding non-STS senior AAA bonds to the portfolio. In this case, AAA CLOs would be an excellent choice. These bonds have an elevated spread and still a decent RoC. This portfolio would have the following characteristics.

 

 

Key characteristics

 

  • Senior AAA/AA rated ABS portfolio, well diversified in terms of country and collateral  
  • Spread over swaps: +0.9% (EUR); Yield: +3.1% (EUR)
  • Weighted average life: 3.0yrs;
  • Modified duration: 0.25 years (100% floating rate notes)
  • Solvency II -> Capital charge: 4.2% ; Return on Capital (EUR)*: 20.4%
  • EUR and GBP denominated bonds (hedged to preferred base currency)
  • ESG score is ~2 on a scale of 1 to 5

 

For the former portfolio the spread over swap is 0.7% and the RoC almost 30%. The latter portfolio has a higher spread over swap (0.9%) but a lower RoC of 20%.

 

However, both ABS portfolios compare quite favorably to the RoC of European covered bonds and corporate credit portfolios as both spread and RoC are lower with an RoC in the high single digits. In the following table we show the precise numbers for representative portfolios of covered bonds, investment grade (IG) corporate credit and high yield (HY) corporate credit. With regard to covered bonds we take a portfolio which consists of 100% AAA-rated bonds with a duration of 6 years. For IG corporate credit we have a look at a portfolio which consists of 50% A-rated and 50% BBB-rated bonds with a duration of 5 years. The spread on such a portfolio with a duration of 5 years would be 0.68% over swaps.  With respect to HY corporate credit, we consider a portfolio of 50% BB-rated and 50% B-rated bonds with a duration of 5 years.

 

  Capital charge Market spread (bps) Return on Capital
Covered Bonds (AAA;6Y) 4.0% 38 9.4%
IG Corporate Credit portfolio (A/BBB;5Y)  9.8% 68 7.1%
HY Corporate credit  portfolio (BB/B;5Y) 30.0% 244 8.1%

 

Table 3. Current capital charges and RoC for IG and HY corporate credit under Solvency II. Source: Aegon Asset Management and BAML as of September 30, 2025. RoC has been calculated assuming funding costs are equal to 3M Euribor.

 

 

 

Figure 1. RoC the different asset classes under Solvency II. Source: Aegon Asset Management and BAML as of September 30, 2025. RoC has been calculated assuming funding costs are equal to 3M Euribor.


In the above graph, we show the RoCs for the ABS portfolios and the other sectors altogether. We can conclude that the ABS portfolios come out quite favorable.

 

Conclusion

 

The European Commission’s proposed Solvency II changes significantly reduce capital charges for senior ABS, especially AAA and AA tranches, improving RoC and restoring competitiveness versus corporate credit. Optimal portfolios favor STS senior bonds for efficiency, while selective inclusion of non-STS AAA CLOs offers higher spreads without excessive capital strain. Get in touch with us to find out more.  

Important information

Authors

Maarten Jan Hoefnagel
Senior Portfolio Manager, RMBS & Consumer ABS
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Balint Vágvölgyi
Senior Portfolio Manager, ABS & CLO

Bálint Vágvölgyi, PhD, CFA, is a portfolio manager in the European ABS team. Prior to joining the firm, he worked for NIBC Bank as an ABS risk manager and subsequently as a trader. 

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New Solvency II proposal bodes well for ABS capital charges for insurance companies
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New Solvency II proposal bodes well for ABS capital charges for insurance companies
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