Beginning in 2027, changes to the Solvency II framework will reduce capital requirements for high-quality Collateralized Loan Obligations (CLOs). CLOs are structured securities backed by diversified portfolios of corporate loans, with different risk tranches ranging from highly rated AAA notes to equity investments. The reform is designed to align regulatory capital charges more closely with the underlying credit risk, making the asset class increasingly attractive for European insurance companies.

«Lower capital charges should encourage greater demand for CLOs from Solvency II-regulated insurers», Raman Rajagopal, Senior Client Portfolio Manager at Invesco, told finews.

More Than a Regulatory Story

Rajagopal argues that the expected increase in demand is not driven by regulation alone.

Instead, the appeal lies in the investment characteristics of CLOs themselves.

Unlike traditional corporate bonds, most CLOs are backed by floating-rate senior secured loans. As a result, they carry very limited interest-rate duration while continuing to generate relatively attractive income.

«Investors are able to combine high levels of income with very low duration—something that is difficult to achieve in traditional fixed-income markets», Rajagopal said.

At a time when many institutional investors remain cautious about interest-rate volatility, this combination has become increasingly valuable.

Strong Credit History

According to Invesco, the highest-rated CLO tranches have demonstrated remarkable resilience over more than three decades.

Across both the U.S. and European markets, there has never been a default in AAA- or AA-rated CLO tranches.

For insurers, whose investment portfolios are subject to strict capital and credit-quality requirements, that historical performance represents a significant advantage.

A Gradual Portfolio Shift

Despite the regulatory changes, Rajagopal does not expect insurers to make abrupt changes to their asset allocation.

Insurance companies typically rely on long-term strategic asset allocation models and sophisticated internal risk frameworks that extend well beyond minimum regulatory requirements.

«The Solvency II changes should accelerate an existing trend rather than trigger an overnight transformation», he said. 

Initially, insurers are expected to focus on highly rated investment-grade tranches before gradually expanding into higher-yielding parts of the CLO capital structure.

Improving Portfolio Efficiency

Rajagopal believes CLOs increasingly fill a gap left by traditional fixed income.

Rather than relying exclusively on fixed-rate government or corporate bonds, institutional investors are using floating-rate credit exposure to reduce duration risk while maintaining attractive income.

From a portfolio construction perspective, this can improve risk-adjusted returns and broaden diversification.

Interest in the asset class therefore extends well beyond insurers, ranging from pension funds and banks to sovereign wealth funds and other large institutional investors.

Easier Market Access

At the same time, access to the market continues to improve.

While CLO investing was once largely confined to specialist institutional investors, a growing number of investment vehicles now provide more efficient implementation.

AAA-rated CLO ETFs, for example, allow investors to gain diversified exposure through a transparent and liquid format, potentially accelerating broader adoption of the asset class.

Switzerland Is Unlikely to Be an Exception

Rajagopal expects Swiss insurers to follow the same direction as their European peers.

In his view, demand for CLOs is driven less by country-specific regulation than by the structural characteristics of the asset class itself.

As regulatory capital requirements become more favorable and investors continue searching for high-quality income with limited duration risk, Switzerland is likely to participate in the broader shift toward CLO investing.