US standard-setting organisation the NAIC has released its stress testing results on US 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, analysts believe 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 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 is said to remain 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.
