Year-end 2018 was the first year that U.S .insurers were required to report bank loans as separate line items in their annual statement filings. Eric Kolchinsky (Director, NAIC Structured Securities and Capital Markets) of the NAIC's SVO presented on the insurance industry’s exposure to leveraged Loans and CLOs on Sunday August 4, 2019.
Leveraged Loans (LL) are loans made by a group of lenders to companies whose credit quality is typically below investment grade. LL are purchased directly by companies or though structured pools known as Collateralized Loan Obligations. CLOs are structured securities collateralized primarily by leveraged bank loans, which include broadly syndicated bank loans (BSLs) and middle market (MM) loans.
While bank loan issuance has experienced steady growth in recent years, bank loans are still considered to be illiquid relative to other fixed income securities. Underwriting quality for LL has also deteriorated since the financial crisis. CLOs, as a product, have weathered two recessions, but their performance may be impacted if LL experience greater than historical defaults and severities.
The risk is greatest especially for those insurance companies where bank loans and CLOs may be a significant percentage of total capital and surplus.
The NAIC SVO is currently monitoring bank loan exposure trends and will report on the development of any trends.
For those interested in reading more about LL and CLOs please see recent reports from the SVO.