December 13, 2024 - This article has been updated to highlight new details on the transition to model-based RBC charges for CLO notes.
On December 5th, the NAIC’s SSG released preliminary probability weights for the 10 stress scenarios to apply to BSL CLO notes. Recall that the scenarios and probabilities are part of the NAIC’s process for transitioning from a ratings-based to model-based approach for designating risk and resulting RBC charges to BSL CLO notes. This change is designed to better assess risk and prevent RBC arbitrage.
The SSG is soliciting feedback on its methodology and, beginning in early 2025, plans to publish estimated RBC charges monthly using the new probability weightings. The American Academy of Actuaries is independently developing a framework for calculating CLO note RBC charges that it expects to release in early 2025. If adopted, this framework will become the standard for determining the RBC charges.
August 21, 2024 – Last week, the National Association of Insurance Commissioners (NAIC) convened its Risk-Based Capital (RBC) Investment Risk and Evaluation Working Group (WG) as part of its Summer National Meeting. Among other things, the WG adopted minutes from its June meeting, during which it held a vote on the capital charge for residual (i.e., equity) tranches of securitizations.
Recall that the agenda for the June meeting focused on the proposal submitted by Everlake Life Insurance Company on the interim RBC factor for residuals. Following a discussion of the comment letters received, a motion was proposed to uphold the adoption of the 45% capital charge for all residuals, effective 2024, as an interim solution. The motion passed nine-to-six in a roll call vote.
By comparison, Everlake’s proposal floated an RBC factor of 45% for BSL CLO equity and 30% for private credit CLO equity. It also contemplated potential exemptions, a 30% factor for certain interests and a 45% factor for all other residual tranches and interests.
Separately, the NAIC’s Valuation of Securities Task Force met over the course of the National Meeting and adopted minutes from its June meeting. The Task Force oversees the Structured Securities Group (SSG), which in June 2022 proposed revising the methodology for determining RBC for CLO debt tranches from a ratings-based approach to a model-based approach to eliminate RBC arbitrage.
During the June meeting, the Task Force amended the effective date for the implementation of CLO modeling to year-end 2025 from year-end 2024. Per the amendment, beginning with year-end 2025 for CLOs, SSG will produce probability weighted net present values using its financial model with defined analytical inputs it has selected. SSG will model CLO investments and evaluate all losses across all debt and equity tranches under a series of calibrated and weighted collateral stress scenarios to assign NAIC Designation Categories for a specific CLO tranche.
The LSTA will continue to monitor and provide updates on the CLO modeling implementation.
