AGEFI Luxembourg - septembre 2025

Septembre 2025 33 AGEFI Luxembourg Fonds d’investissement By Dr. Sebastiaan Niels HOOGHIEMSTRA, Loyens & Loeff Luxembourg * O n 8 January 2025, Directive (EU) 2025/2was published, in- troducing amendments toDi- rective 2009/138/EC (“Solvency 2”). The amendeddirective sets out the revised framework for the “long-term equity investments” (“LTE”) sub-model, including a prefe- rential 22%capital charge, and establishes a specific treat- ment for European long-term investment funds (“ELTIFs”) as well as other “low-risk” alterna- tive investment funds (“AIFs”). On 17 July 2025, the EuropeanCom- missionpublished a draft CommissionDele- gatedRegulation (“DCDR”) amending DelegatedRegulation (EU) 2015/35, which provides further clarifications on the applica- tionof the LTE sub-model. This contribution examines the implications of these legislative developments for insurers, with a particular focus on investments inELTIFs andother low-riskAIFs. Unlocking Long-TermEquity: AIFs in the Solvency 2 Framework The treatment of long-term equity investments has beenon theEuropeanCommission’s agenda for sev- eral years. Despite policymakers’ stated objective of encouraging such investments, insurers’ actual allo- cationstoequitieshaveremainedmodest.Toaddress this, Solvency 2 introduced a dedicated LTE sub- model category in 2016, designed to differentiate strategic, long-termholdings fromdaily-tradedequi- ties. The LTE category effectively operates as a “safe harbour”within theSolvency2 framework for quali- fyinglong-terminvestments,i.e.equitieswhereinsur- ers can demonstrate that they are not exposed to short-termforced-sale risks. Theimportanceofthis“safeharbour”cannotbeover- stated. Without the LTE category, Solvency 2 would render long-term, illiquid equity holdings far less at- tractive for insurers. The category is particularly rele- vant for exposures to private equity and venture capital funds. Since Solvency 2primarily assesses eq- uityriskthroughthelensofmarketvolatility,theLTE category plays a critical role in ensuring that the spe- cificcharacteristicsofinsurers’long-terminvestments areproperlyreflectedinthesolvencyriskassessment. Despite regulatory efforts byEuropeanauthorities to make long-term equity investments more attractive, insurers’ investments in private equity and venture capitalfundshave,todate,remainedlimited.Thecur- rentrequirementsareperceivedasoverlyprescriptive anddifficulttoimplementinpractice.Capitalcharges of39%oreven49%areconsideredtoohighforinsur- ers seeking tooptimize their overall SolvencyCapital Requirement (“ SCR ”), particularly for those that struggledtomaintaintheirsolvencyratiosduringthe last decade of lowinterest rates. Moreover,insurersinvestinginfundsmustadoptthe “look-throughapproach”whencalculatingtheirSCR. ThisrequirescalculatingtheSCRbasedontheunder- lying assets within a fund structure and ap- plying this approach sufficiently to capture allmaterialrisks.Inthecaseoffund-of-funds or feeder/master fund structures, insurers must “look-through” eachunderlying fund sothattheSCRreflectstheultimateunderly- ing assetswherever possible. From its adoption, it became clear that Solvency 2’s short-term focus on marketriskconflictedwiththe European Union’s objective of facilitating long-term sus- tainable growth. Insurers, as amajorinvestorgroupinEu- rope,weredirectlyaffectedby thismisalignment. Inresponse,amendmentstoSol- vency2havebeenintroducedover the past fewyears to support long-term in- vestments without compromising capital require- ments. These include a more favorable regime for infrastructureinvestmentsandspecificprovisionsfor qualifying unlisted equity portfolios (QUEP) and long-termequity (LTE) holdings. The Flexibilization of the LTEModule under theAmendedSolvency 2Regime TheLTEregimewasintroducedbyCommissionDel- egated Regulation (EU) 2019/981) in 2019. An exten- sivesetofeligibilitycriteriawasestablishedtoprevent regulatory arbitrage by insurance undertakings.As a result, the LTEhas so far had limited success in facili- tating additional equity investments and supporting long-termsustainable growth. Directive (EU) 2025/2, which amends Solvency 2, seeks toenlarge theLTEcategoryandease the condi- tionsforapplyingtheregime,withtheaimofhelping achieveEurope’ssustainabilitygoalsbyeasingcapital requirements, introducingmore flexible rules for eli- gibleinvestments,andrelaxingthe“look-through”re- quirements for certain low-risk AIFs, in particular ELTIFs.Toencourageinsurerstoinvestmorerobustly andstrategicallyinlong-termprojects,theLTEregime reducesthecapitalrequirementsforspecificlong-term equityinvestmentsfrom39%to22%.Thisadjustment isintendedtoencouragegreaterparticipationinlong- term investments, enabling insurers to allocate more capital to long-term equity assets, such as (low-risk) AIFs andELTIFs. Eligible Investment Rules under the Revised LTE Module:AMore FlexibleRegime Directive (EU) 2025/2 sets out clear more flexible eli- gibility criteria for (long-term) investments to qualify for the reduced capital requirements under the LTE module. To qualify, an insurance undertaking has to demonstrate,tothesatisfactionofthesupervisoryau- thority, that all of the following conditions aremet: 1.thesub-setofequityinvestmentsisclearlyidentified andmanaged separately fromthe other activities; 2. a policy for long-term investment management is set up for each long-termequityportfolioandreflects theundertaking’s commitment tohold the global ex- posure to equity in the sub-set of equity investment for a period that exceeds five years on average; 3. the sub-set of equity investmentmust consist of eq- uitieslistedinEEAorOECDcountries,orunlistedeq- uitiesfromcompaniesheadquarteredintheseregions; 4.theinsuranceundertakingisabletodemonstrateto thesatisfactionofthesupervisoryauthoritythatonan ongoingbasisandunderstressedconditions,itisable to avoid forced selling of equity investments within the sub-set for five years; 5. the risk management, asset-liability management andinvestmentpoliciesoftheinsuranceundertaking reflect the insurance undertaking’s intention to hold the sub-set of equity investments for a period that is compatible with the requirement laid down in Nr. 2 andNr. 4; 6.thesub-setofequityinvestmentisappropriatelydi- versified in such away as to avoid excessive reliance onanyparticularissuerorgroupofundertakingsand excessiveaccumulationofriskintheportfoliooflong- termequityinvestmentsasawholewiththesamerisk profile; and 7. the sub-set of equity investment does not include participations. Low-risk AIFs, ELTIFs & Look-through Require- ments In the fundcontext, the amendedSolvency2 regime allows ELTIFs and certainother low-riskAIFs to as- sess the LTE sub-module’s eligibility requirements at the fund level only, thereby eliminating the need for the current “look-through” approach.However, the amended Solvency II requires a delegated act to determine the criteria forAIFs that qualifyas having a lower risk profile. For this purpose, a first draft of theDCDRwas published in July2025, proposing in Article 171d that ELTIFs, EuSEFs, EuVECAs, and closed-endedAIFswouldqualifyas lower-riskAIFs for the “fund-level only” assessment of theLTEsub- module’s eligibility requirements. Closed-endedAIFs, however, onlyqualifyas lower- risk AIFs if they (i) are managed by an authorized EUAIFMand (ii) employno leverage inaccordance with the commitment method set out inArticle 8 of Delegated Regulation (EU) No. 231/2013 (the AIFMDLevel 2 regulation). With respect to “low-risk AIFs”, Recital 25 of the DCDRproposesthattheuseofderivativeinstruments for hedging purposes, as well as temporary borrow- ingarrangementsfullycoveredbycontractualcapital commitments from investors are excluded from the leverage calculation. These AIFs, as well as ELTIFs, EuVECAsandEuSEFsarealsoconsideredlower-risk forthepurposeofidentifyinglong-termequityinvest- ments, including when invested in qualifying infra- structure equities or qualifying infrastructure corporate equities. AIFs that do not fall under any of the categories specified by theDCDR are required to assess the LTE sub-module’s eligibility requirements attheleveloftheirunderlyingassetsinordertobenefit fromthe 22%SCR charge. ForELTIFs,EuVECAs,EuSEFs,andlow-riskAIFs,the DCDRproposesapplyingthe22%SCRchargeasfol- lows: -Case(a)–Fulllook-through: Ifaninsurercanapply a full look-through to all the fund’s holdings, the eq- uitieswithin theAIF are treated like directly held eq- uities for Solvency 2 capital requirement purposes; -Case (b) –Partial look-through: If an insurer cannot fullylookthroughalloftheAIF’sholdings,theequity charge applies to the units or shares of theAIF itself, rather than to its underlying assets. Outlook: ELTIFs under the AmendedSolvency II Regime With the amended Solvency 2 LTE regime, the Eu- ropeanregulator acknowledges that privatemarkets are here to stay and that a larger allocationof invest- ments in this domain by insurance companies is needed to stimulate and support growth in the real economy, particularly in financing the green transi- tion as part of Europe’s sustainability initiatives. Insurers represent an attractive type of investor for the European AIF industry, as they receive premi- ums in advance that can be invested continuously over the long term. This allows them to hold invest- mentsacrossdifferentbusinessandeconomiccycles. In addition, allocating more capital toward alterna- tive investments provides insurers with greater diversification opportunities across asset classes. With a view to the above, fund promoters are cur- rently considering whether they could launch and marketopen-ended,evergreenAIFstoEUinsurance undertakings, as evergreen structures would allow for continuous fundraising. However, it is clear that the “low-risk AIF” category under the DCDR pro- posal is ill-suited for thispurpose, as suchAIFsmust be closed-ended andmay not employ any leverage at the fund level, effectively limitingbothmarketing and investment opportunities. ELTIFs, by contrast, are identified as “low-risk” by default under the DCDR and can employ leverage within the boundaries set by ELTIF rules, as well as be structuredasopen-ended.Nonetheless, the fund- level assessment required under the LTEmodule is likely to restrict themarketing of open-ended, ever- green ELTIFs to EU insurance undertakings. This is because theeligibilitycriteriaof theLTEsub-module require that equity in the relevant subset of invest- ments must be retained for an average period ex- ceeding five years. While the “core investments” of anopen-endedELTIFmaymeetthiscriterion,there- demptionopportunitiesandcorrespondingliquidity pockets could prevent such ELTIFs from fully qual- ifying under the LTE sub-module. To address this, evergreen ELTIFs could be de- signedwith adedicated share class inwhich invest- ments are locked up for a minimum of five years. Furthermore, fund promoters often need to estab- lishdedicated (sub-)funds for insurance companies. This is particularly relevant because combining high-net-worth individuals with insurance under- takings ina single (sub-)fund can create governance complications. Insurance companies must comply with their own regulatory requirements,which, un- like for professional AIFs without an ELTIF label, may be difficult to reconcile under the retail ELTIF rules. For example, the principle of equality of shareholders. A key question remains whether the regulator will succeed in enlarging the scope of LTE and whether the easing of LTE eligible investment rules will be sufficient to support Europe’s sustainability goals. Although the contemplated amendments are mov- ing in the right direction, particularly with view to the elimination of the “look-through” assessment and the relaxation of eligibility criteria, compliance with the requirements may still be perceived as a complex exercise. It remains uncertain whether the newLTEregime, and theapplicationof its criteriaon a “no look-through” basis to low-risk AIFs and ELTIFs,willmakethiscategorysufficientlyattractive for insurers. (*) Dr. Sebastiaan Hooghiemstra is a senior associate in the invest- ment management practice group of Loyens & Loeff Luxembourg and Senior Fellow of the International Center for Financial Law & Gover- nanceattheErasmusUniversityRotterdam. Draft Level 2 Solvency 2 Rules: Clarifying ELTIFEligibility under the LTEModule L es banques de l'Union européenne (UE) sont suffisamment solides pour faire face à un choc éco- nomique provoqué par des tensions géopolitiques et commerciales, a déclaré l'Au- torité bancaire européenne (ABE) enprésentant les ré- sultats de sondernier test de résistance du secteur. L'ABE a testé la manière dont 64 banques européennes réagi- raient à une récession prolongée dans l'UE et d'autres économies avancées, concluant qu'aucune ne passerait en dessous de l'exi- gence minimale de fonds pro- pres, et qu'une seule ne respecte- rait pas son exigence de levier. "Les résultats indiquent que le système bancaire de l'UE pour- rait résister àun scénariomacroé- conomique sévère mais plausi- ble, reflétant la résilience acquise par les banques ces dernières années", a déclaré l'ABE, appe- lant les établissements à mainte- nir unniveau adéquat de capital. Les autorités bancaires euro- péennes et américaines ont mis en place des tests de résistance formels et complets après la crise financièremondiale de 2008, qui avait entraîné de coûteux sauve- tages publics de banques. Certains éléments du scénario défavorable de cette année ont commencé à se matérialiser, a indiqué l'ABE, en évoquant les droits de douane américains et les tensions croissantes au Moyen-Orient. Les banques de la zone euro représentant les trois quarts du total des actifs bancaires de l'UE ont participé à l'exercice, qui simule les pertes qu'elles pour- raient subir en analysant leur performance sur une période de trois ans selon un scénario de référence et un scénario défavo- rable. Dans le scénario défavo- rable, l'aggravation des tensions géopolitiques et des politiques commerciales protectionnistes entraîne une hausse des prix de l'énergie et des matières pre- mières, perturbe les chaînes d'approvisionnement et pèse sur la consommation ainsi que sur l'investissement, provo- quant une contraction cumula- tive de 6,3% du produit inté- rieur brut (PIB) de l'UE sur la période 2025-2027. Cela se traduirait par des pertes cumulées de 547 milliards d'eu- ros pour les banques testées, a indiqué l'ABE, unmontant supé- rieur aux 496 milliards d'euros envisagés lors de son test de résistance de 2023. Si l'impact sur les réserves de capital est particulièrement sévère pour certaines filiales européennes de grandes banques américaines, tous les établissements sont restés en mesure de respecter les exi- gences fondamentales en matière de fonds propres, a indi- qué l'ABE. Un seul établisse- ment ne respecterait pas l'exi- gence relative au ratio de levier. En termes de réserves de capital, calculées selon le régime "tran- sitoire" actuel qui ne s'appli- quera pleinement qu'en 2033, le scénario défavorable réduirait de 3,7 points de pourcentage le ratio agrégé de fonds propres de base des banques testées, le fai- sant passer de 15,8% en 2023 à 12,1% en 2027. Source : Reuters Stress test de l'Autorité bancaire européenne (ABE) Les banques suffisamment solides pour faire face à un choc économique ©ABE