NAIC Spring 2026: What Insurance Investors Need to Know about CLO and Collateral Loan Capital Charges

Background

The National Association of Insurance Commissioners (“NAIC”) held its 2026 Spring meetings in San Diego. The NAIC received updates from various working groups, including the RBC Investment Risk and Evaluation Working Group, Life RBC Working Group and the American Academy of Actuaries (“Academy”) on the proposals relating to capital charges (factors) for CLOs, Collateral Loans and other assets in order to refine and advance the regulatory framework governing capital treatment of such assets held by Life Insurance companies. 

CLO RBC Updates

 The CLO RBC Project focuses on developing instructions for separate capital charges for insurance company investments in CLO debt and remains the central focus of the working groups and industry stakeholders. The Academy is making measurable analytical progress in assessing the appropriate capital charges for investments in CLO debt securities which are currently reported as long-term bonds. The Academy, in collaboration with NAIC’s Structured Securities Group, has built a working C-1 factor model (“Risk Factors Study”) targeting CLO debt that is now being commented on and refined. The Academy’s model focuses primarily on ratings, as substantial indicators of tail risk, as well as tranche thickness for lower rated tranches. The proposed factors are horizon-neutral, although ratings and tranche thickness for debt tranches rated Baa3 and below are adjusted for systematic differences in reinvestment horizons. CLO collateral credit and cash flow modeling are largely consistent with C-1 corporate bond modeling but there are some differences in light of CLOs’ structural features (for example, missed payments on CLOs do not necessarily trigger defaults). The Academy presented two alternative sets of modeled CLO C-1 factors: one based on ratings only and the other accounting for both ratings and tranche thickness of certain lower tranches. The proposed capital charges in the first instance range from 0.03% to 2.73% for investment grade CLO tranches and 12.59% to 70.82% for below investment grade tranches. When tranche thickness is also taken into account, capital charges for Baa3 and below increase materially but only if the relevant tranche is 4% or less of CLO capital. For example, the factor for Baa3 that is ordinarily 2.73% is increased to 12.52% if Baa3 represents less than 4% of CLO capital. During the meetings, the Academy noted that their Risk Factors Study focused solely on BSL CLOs. In particular, they noted that tranche thickness may not be relevant with respect to Middle Market/Private Credit CLOs. However, the CLO RBC Project proposal does not make this distinction and if adopted in the current form, would arguably apply with respect to all CLOs.

The working group noted that it has thus far received comments on the CLO RBC Structure proposal and re-exposed a modified proposal for a 25-day public comment period ending April 17 and Risk Factors Study ending on April 16.

Collateral Loan Updates

The Life RBC working group has likewise re-exposed proposal 2025-16-L MOD (Collateral Loans) for a 23-day public comment period ending April 13. In 2025, the NAIC staff drafted a proposal based on the Capital Adequacy Tast Force (CADTF) study and development of different RBC factors for Collateral Loans based on underlying collateral. The proposal included RBC factors for Collateral Loans based on underlying collateral type:

• Mortgage Loans – 3% (consistent with CM-3)
• Equity interests in JVs, partnerships, and LLCs – 30% (a material increase from the 6.8% charge)
• Residual tranches – 45%
• All other types of collateral – 6.8%

Subsequently, the American Council of Life Insurers proposed a “look-through” approach whereby capital charges ranging from 10% to 90% are assigned based both on the specific type of assets securing the loan and overcollateralization rather than applying a single uniform charge of 30% to all collateral loans backed by equity interests regardless of collateral level. The regulators have questioned whether regulators and auditors will have access to information needed to verify the level of overcollateralization but have agreed to re-expose the proposal for comment and delay implementation to the 2027 reporting cycle.

Conclusion

Despite the recent developments in the credit markets, the NAIC is taking a measured approach to its assessment of capital treatment of CLOs and Collateral Loans, informed by the ongoing analysis and expert studies as well as seeking broader industry engagement before finalizing the approach. In the CLO space, the NAIC is operating under a tight schedule in order to make the changes effective in the current reporting period – that is, for 2026. If the proposals are not timely adopted by the relevant working groups and the regulators, the implementation will be delayed to the end of 2027. With respect to Collateral Loans, the working group has agreed to delay implementation to 2027.