Two regulators, opposite directions

Changing capital charges and the focus on insurance capital as a source of liquidity in ABF

On 23 June the National Association of Insurance Commissioners adopted new C-1 capital factors for insurer holdings of CLO tranches. A position rated Baa3 carries a charge of 3.281%. One notch lower, at Ba1, the same position carries 15.132%. The step is 11.85 points, roughly 4.6x, and it sits precisely on the investment-grade boundary where ratings migrate most often.

There is a second cliff at the same rating. A Baa3 tranche thinner than four points attracts 15.048% rather than 3.281%. Nothing about the credit has changed. The structure alone moves the charge by a factor of four and a half.

Four months earlier, the European Commission moved in the opposite direction. Commission Delegated Regulation (EU) 2026/269 was published in the Official Journal on 18 February 2026 and applies from 30 January 2027. It inserts a new Article 178(8) into the Solvency II delegated regulation, creating differentiated spread risk factors for senior non-STS securitisation tranches for the first time. Those positions previously sat in a single undifferentiated bucket regardless of seniority, carrying 12.5% at the top credit quality step. The new senior factor at the same step is 2.7%. Albeit in a much thinner market but all the same.

The mechanism, not the headline

The Solvency II spread stress is the factor multiplied by modified duration for durations up to five years. Short duration therefore reduces the charge linearly. A three-year AAA CLO position falls from 37.5% to 8.1% on PineBridge’s working of the new tables. For AAA non-STS positions at around 6.3 years weighted-average life falls from 78.7% to 17.0% on UBS Asset Management’s analysis. Those are secondary characterisations of enacted rule text rather than forecasts.

What that arithmetic says to anyone structuring for an insurance buyer is that tenor is now a capital variable rather than a preference. Matching a short-dated rated tranche to a same-year reserve pool is no longer only an asset-liability argument. It is a pricing argument, and it is written into the regulation rather than into a manager’s marketing. Does this change P&C liability and asset matching pricing, and if so when?

One qualification that the enthusiasm around the recalibration tends to omit. Under Article 180, qualifying central government exposures attract a zero spread risk factor. A short-dated rated ABF tranche therefore remains strictly more capital-expensive than a government bond, whatever the recalibration does. The yield pick-up has to cover the difference, and at CQS 0 with two years of duration the difference is small but it is not nothing and the balance on the risk adjusted yield has to be material enough to bridge the gap from the yield on treasuries.

The allocation gap this lands on

The two moves matter because the starting positions are so far apart. Fitch put US life insurers at nearly 15% of assets in securitised product against 3% for their EU counterparts, some of this is just because of the bank market but not entirely. On a bond portfolio basis AFME found 25.04% against 1.60% in 2023. The US has been the natural home for insurance money in structured credit for two decades whereas the EU…

Both regulators have now moved against that gap at once. The US is raising the capital cost of the asset that its insurers hold heavily. The EU is cutting the cost of the asset that its insurers barely hold at all. How to place a structured product to a market that isn’t that deep is always a challenge.

The awkward evidence

Here is the part that should give everyone pause, including anyone using structured paper into European insurance balance sheets on the strength of the recalibration.

EIOPA asked insurers, in 2022, directly why they do not invest in securitisation. Only a few cited capital charges. Roughly 12% of European standard-formula insurers held any securitisation exposure at all, and around 60% of those held less than 1% of total assets. The majority gave a different reason: mismatched risk and return profiles, and asset-liability management preference. The Joint Committee of the European Supervisory Authorities, what a mouthful, recommended keeping the framework as it was, of course. EIOPA’s Executive Director said publicly in September 2023 that the limited appetite was not a result of the regulatory framework. Insurance Europe accepted in December 2024 that correcting the charges and easing the operational requirements will not necessarily increase allocations.

The Commission has recalibrated capital charges on the theory that they are the obstacle, while the supervisor’s own survey evidence says they are not. Both positions cannot be right, and the answer will be visible in allocation data within about two years of the January 2027 application date. Patience comes to those who wait.

For the allocators

Three things, in order of how quickly they will resolve.

• Will EU insurer allocations to senior non-STS paper move at all after January 2027. If EIOPA is right, prices move and allocations do not, and the binding constraint on insurance money entering ABF stays where it has always been, which is asset-liability fit. That is a structuring question rather than a lobbying one presumably.
• How do US insurers respond to the new C-1 factors by reducing structured credit exposure or by restructuring it. The thin-tranche cliff punishes a structural feature rather than a credit view, and structural features can be re-engineered. Thicker tranches at the same rating are the obvious response but will change deal economics.
• If the PRA follows the EU. PS19/25 in October 2025 dealt with CRR restatement and ECAI mapping. No matching UK securitisation recalibration has been published. If one comes, this becomes a three-regime story and UK insurance balance sheets become the interesting question rather than a footnote to the European one. Another brexit dividend!

Capital treatment does not merely price an asset for the balance sheet that holds it. It shapes what gets structured in the first place. The New York Fed’s work on CLOs and insurer demand makes that case directly: favourable capital treatment increased insurer appetite for particular tranches, and the deals were then built to supply them. Read forwards, two regulators moving in opposite directions on the same asset in the same year is not a pricing footnote. It is an instruction to two sets of arrangers to build different things.

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