Stress Testing Insurers CLO Exposure

by Jennifer Johnson, Jean-Baptiste Carelus, Eric Kolchinsky, Hankook Lee, Michele Wong, Elizabeth Muroski, Azar Abramov of the NAIC

"Stress test results for year-end 2020 showed:

1 - Losses on “normal” CLO tranches—i.e., those with regular promises of principal and interest—reached A-rated tranches under the worst-case scenario.

2 - For Atypical CLO tranches—i.e., those with unusual payment promises, such as equity tranches and Combo Notes—losses reached AA-rated securities.

Based on the NAIC’s stress test results, U.S. insurer investments in CLOs remain an insignificant risk. 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."

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Stress Testing Insurers CLO Exposure

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