February 12, 2025 - The NAIC’s Risk-Based Capital (RBC) Investment Risk and Evaluation Working Group held a call yesterday to provide a status update from the American Academy of Actuaries on the Structured Securities RBC Project (i.e., the Academy’s framework for calculating RBC charges for CLO notes), which has been underway since 2022. As we’ve previously noted, this framework will become the RBC charge methodology standard if adopted.
The Academy reported that it received Moody’s CLO data (including candidate comparable attributes, tranche-level and deal-level data, and collateral details) and developed a collateral modeling approach that used a bond model, adjusted for the seniority of loans, to produce a loss distribution. Additionally, it developed a scenario compression approach. Given certain limitations of this approach (first, it is not feasible to run thousands of collateral loss scenarios through the CLO cash flow model, and second, it is not practical to use only a single scenario due to the cliff-shaped loss distributions of CLOs), the Academy will divide the collateral loss distribution tail into several ranges and run the average loss of each range through the CLO cash flow model.
The Academy’s remaining work includes obtaining a C-1 bond factor model or results allowing for collateral modeling and scenario compression specification. (A C-1 bond factor model applies a specified weight to each rating category to determine a bond’s C-1 capital charge, i.e., the capital required to cover risk of default loss, subordination and credit leverage, and event risk.) Other next steps include setting parameters for the CLO cash flow model and converting CLO cash flows into losses for C-1 capital, allowing for the identification of comparable attributes and development of C-1 base factors.
The RBC WG will convene in person at the NAIC Spring 2025 National Meeting in Indianapolis on March 24th. The Academy will provide another status update at that time.
