Sustainably Solving for Solvency II: credit strategies for insurance portfolios
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Article Type
Insights
Topic
Solutions
Published
November 10, 2025
Read time
5 mins
Authors
Gerard Moerman
Johan Rol
Daniel Torres
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Investment-grade corporate credits represent an essential building block in insurance companies' investment portfolios. This asset class serves critical functions, such as generating additional returns and contributing to liability matching strategies.

 

But how can insurers optimize credit portfolios to meet Solvency II requirements while keeping target return and duration? And what role does Environmental, Social, and Governance (ESG) integration play in reducing credit migration risk and enhancing portfolio resilience?

 

In this paper, we present a strategy for constructing Solvency II–efficient credit portfolios and discuss how integrating ESG factors can further improve their resilience and performance.

 

Solving for Solvency II and managing downside risk

The logic is straightforward: riskier bonds carry a higher spread and higher required capital under Solvency II.

 

From the Solvency II technical specification for corporate bonds1, we highlight that both a lower credit rating and longer duration contribute to a higher SCR. And the increment in SCR per year of duration increases as we descend further down the credit spectrum.

 

Here at Aegon Asset Management (Aegon AM), our strategy to build a buy-and-hold Solvency II - efficient credit portfolio, i.e. to optimize return on SCR (RoSCR), consists of the following three steps:

 

1. Optimizing RoSCR

First, we identify bonds that offer a higher spread over Euribor for a given spread risk SCR or, conversely, bonds that convey a relatively low SCR whilst offering the same spread over Euribor. Such bonds are those that situate closer to the green arrow in Figure 1.

 

Figure 1: Optimizing RoSCR

AA, A, and BBB rated bonds distribution. Bonds above the red line have a RoSCR higher than 10%

 

The investor can achieve a targeted spread over Euribor2 at a specific duration3, while minimizing the credit spread risk component of the SCR within the  portfolio. We’ve found that A-rated bonds usually deliver the strongest RoSCR in insurance portfolios.

 

2. Maintain the portfolio’s efficiency by minimizing rating migration risk

As mentioned above, the capital penalties that come with credit downgrades are steep. 

 

To illustrate this, we’ve taken an AA-rated bond with a spread of 70 basis points over Euribor and a modified duration of 5 years. Exhibit 1 illustrates the effect on the SCR and RoSCR when the bond is downgraded4. We observe that from AA to A there is a loss in RoSCR of 21.4%. The loss on SCR is more severe when the bond is downgraded from A to BBB (44%) and even more severe when downgraded to BB (44.4%).

 

Exhibit 1

 

AA

A

BBB

BB

SCR

5.5%

7.0%

12.5%

22.5%

RoSCR

12.7%

10.0%

5.6%

3.1%

Impact in RoSCR

-

-21.4%

-44.0%

-44.4%

 

Figure 2: Migration effect on RoSCR

 

Therefore, we implement a robust migration risk management system that actively monitors and analyzes each issuer’s downgrade risk. Monitoring migration risk requires close tracking of traditional financial fundamentals, such as underlying cash flow generation and issuer-specific event risks.

 

To further strengthen portfolio efficiency and mitigate the steep capital penalties associated with downgrades, integrating ESG factors into credit analysis provides an additional layer of resilience and risk management.

 

3. ESG and its impact on RoSCR

By selecting bonds with a better ESG risk profile, we mitigate portfolio volatility and downgrade risk enhancing the stability of the portfolio.

 

Our ESG risk analyses help us select business profiles which are more resilient over time and this contributes to lower migration risk in portfolios and more stable returns. They further provide a more complete picture of the risks and opportunities faced by an issuer. The integration of ESG factors into credit analysis can help reduce idiosyncratic and portfolio risk and improve portfolio performance by helping investors anticipate and avoid investments that may be prone to widening credit spreads, price volatility, and ultimately to credit rating  downgrades. And, by extension, this integration strengthens Solvency II efficient portfolios by reducing migration risk and contributing to the stability of returns over the long term.

 

Moreover, the European Insurance and Occupational Pensions Authority (EIOPA) recently recommended additional capital requirements for fossil fuel assets on European insurers’ balance sheets to accurately reflect the high risks of these assets.

 

Either by reducing migration risk, or by potentially avoid additional capital requirements due to fossil fuel related investments, climate transition and Paris aligned portfolios can further improve the efficacy of Solvency II efficient credit portfolios. 

 

Conclusion

Constructing Solvency II–efficient credit portfolios requires a careful balance between regulatory capital optimization and long-term investment resilience. By optimizing for RoSCR, insurers can enhance capital efficiency while capturing the desired spread and duration, and by extension, alignment with their liability profiles. However, sustaining this efficiency over time demands proactive management of migration risk, especially given the steep capital penalties associated with credit rating downgrades.

 

Integrating ESG factors into credit analysis strengthens this approach by offering greater insights into issuer resilience and helping mitigate downgrade risk. ESG integration not only supports downside risk management but can also contribute to more stable returns and improved portfolio quality. For insurers looking to go further, thematic strategies, such as climate transition and Paris aligned portfolios, offer a way to align investment performance with broader sustainability goals, all without compromising on target spread.

 

As regulatory frameworks evolve, ESG-aware and climate-conscious credit strategies will play an even more critical role in shaping future-proof insurance portfolios. By combining capital efficiency with sustainability, insurers can build portfolios that are not only Solvency II–compliant but also resilient and forward looking.

 

1. The complete technical specifications to calculate spread risk SCR for [corporate] bonds are found in Article 176.3 of the Solvency II delegated regulation (Available at: Delegated regulation - 35/2015 - EN - EUR-Lex
2. The desired spread is dynamic and may change with time depending on developments around the interest rate curve.
3. Which, as aforementioned, are key roles of investment grade credit investments for insurance companies.
4. We assume that the spread over Euribor remains constant after the downgrade. In practice, the spread is expected to widen but still not enough to compensate for the increase in SCR

 

Important information

Authors

Gerard Moerman
Head of Liquid Assets, Continental Europe
Gerard Moerman, PhD, is head of fixed income, LDI and investment solutions.
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Johan Rol
Portfolio Manager
Johan Rol is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on credits.
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Daniel Torres
Senior Investment Solutions Consultant
Daniel Torres is an Senior Investment Solutions Consultant in the Fixed Income, LDI and Investment Solutions team.
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