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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.