The Simple, Transparent and Standardised asset-backed security (STS ABS) market can offer attractive potential risk-adjusted returns to complement an exposure to high-quality corporate and government bonds.
A nascent market, the STS framework for investing in asset-backed securities (ABS) can offer European insurers an opportunity to invest in a robust, high-quality and scalable asset class to diversify their core fixed income allocations.
Introduced in 2019, the framework applies significantly lower capital charges to eligible securities than the former 'Type 1' and 'Type 2' charges under Solvency II, while placing stringent requirements on originators in order to increase investor confidence.
Regulators designed STS eligibility to stimulate ABS market activity, particularly in areas that promote lending to the real economy, such as mortgages and consumer lending, as well as loans to small and medium-sized businesses (SME loans). In turn, this provides European insurers the opportunity to access a structurally robust and scalable asset class once again.
Since the STS framework came into effect, supply of STS paper has grown substantially. Despite the increased administrative and reporting burden required for STS issuance, European originators appear unperturbed. In 2024, we observed c.€55 billion of issuance and consensus among market participants points to c.€60 billion of STS issuance this year which would provide even greater depth and breadth of issuers to the existing €255 billion market.
Companies:M&G
