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CLO Testing

NEW YORK (Oct. 7, 2021)

NAIC Releases Stress Testing Report on U.S. Insurers’ Collateralized Loan Obligations Year-End 2020 Exposure

The NAIC today released stress testing results on U.S. Insurers’ exposure to Collateralized Loan Obligations (CLO) Year-End 2020. The 2021 Stress tests examined the resilience of CLOS under three different Scenarios. The year-end 2020 stress test mirrors findings from the year-end 2019 stress test, wherein Normal CLO A-rated tranches experienced losses under the worst-case Scenario.  In comparison, the year-end 2018 stress test resulted in no losses on Normal CLO tranches rated A and higher under the three scenarios.

The NAIC’s Capital Market Bureau and Structured Securities Group performed stress testing on U.S. insurer CLO investments—the year-end 2020, results showed that Normal tranches rated AA and higher did not experience any losses under the three scenarios tested. Nevertheless, NAIC analysis also showed that a few insurers have concentrated investments in Combo Notes and low-rated tranches. Given the complexity and volatility of CLO investments in general, exposure as a percent of total surplus is worth identifying, particularly for insurers with large exposures as a percentage of total surplus.

Capital Market’s special report U.S. Insurers’ Collateralized Loan Obligation (CLO) Exposure Jumps Almost 23% at Year-End 2020 , details U.S. insurer exposure to CLOs. The report finds CLO exposures grew as of year-end 2020 to $192.9 billion from about $156.9 billion as of year-end 2019. Overall, CLO exposure for the U.S. insurance industry remains relatively small, at about 2.6% of total cash and invested assets. The majority (78%) of these investments are rated single A or above, so the NAIC does not believe the CLO asset class currently presents a risk to the industry as a whole. However, significant CLO exposures relative to surplus and concentrated exposures to atypical securities like Combo Notes and low-rated tranches are potential risks, particularly in a stressed environment.

The NAIC will continue to monitor U.S. insurer investments in CLOs and report as deemed appropriate.

About the National Association of Insurance Commissioners

As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.