NAIC Working Group Continues to Discuss Proposed Changes to RBC Factors for CLOs

Since our March 2, 2026 Legal Update, NAIC Working Group Receives Progress Report from the American Academy of Actuaries on RBC for CLOs, the NAIC Risk-Based Capital Investment Risk and Evaluation (E) Working Group (the “RBC IRE WG”), has held one regulator-only session and three public meetings to discuss proposed changes to the risk-based capital (“RBC”) factors applicable to life insurers’ investments in collateralized loan obligations (“CLOs”).

To recap, on March 2, the American Academy of Actuaries (the “Academy”) presented two options for assigning C-1 (investment risk) RBC factors to the debt tranches of broadly syndicated loan (“BSL”) CLOs. The Academy’s first option would assign RBC factors to CLO tranches based on a single comparable attribute—the credit rating. The second option would use an additional comparable attribute—tranche thickness. The tranche thickness attribute would assign higher RBC factors to BSL CLO tranches rated Baa3 or below when the tranche thickness represents 4% or less of the total deal. The Academy’s recommendations were exposed for a comment period ending April 16, 2026.

March 19 Regulator-Only Session

The RBC IRE WG met in regulator-only session on March 19 to discuss comments and questions on the Academy’s March 2 presentation, as well as an RBC impact analysis. Presumably, the reason why the meeting was held in regulator-only session was that the discussion included references to specific insurance companies, which is one of a limited number of permissible exceptions to the NAIC Policy Statement on Open Meetings.

March 23 Session at the NAIC Spring National Meeting

The RBC IRE WG met on March 23 at the NAIC Spring National Meeting in San Diego, chaired by Philip Barlow of the District of Columbia Department of Insurance, Securities and Banking. Stephen Smith, Chair of the Academy’s C-1 Subcommittee, presented a slide deck to address questions raised by regulators and interested parties on the Academy’s March 2 presentation on C-1 RBC factors for Collateralized Loan Obligations.

Among other things, the Academy’s March 23 presentation (included in the meeting materials) set out the data and analytics that led the Academy to propose the option of using tranche thickness as a comparable attribute for assigning higher RBC factors to CLO tranches rated Baa3 or below when the tranche thickness represents 4% or less of the total deal. Mr. Smith explained that the reason for using Baa3 as the breakpoint for the tranche thickness option is that the majority of US insurers’ CLO holdings rated Baa3 or below are rated Baa3.

Mr. Smith also presented a chart summarizing the CLO holdings of all US insurers by rating. The summary indicated that 87.6% by value of insurer’s CLO holdings are rated A2 or higher, which means they would receive a lower RBC factor under the Academy’s proposal than the current corporate bond factor associated with that rating.

In response to a question from a working group member, Mr. Smith confirmed that all of the data used in the Academy’s modeling pertained only to BSL CLOs. He said that a separate modeling process would need to be done to analyze losses on middle market (“MM”) CLOs. He pointed out that such a loss modeling process would be complicated by the fact that the MM loans underlying MM CLOs tend to be unrated, although he suggested that it might be possible to obtain data on the underlying MM loans from the rating agencies’ own internal credit assessments. Mr. Smith also noted that the tranche thickness analysis underlying the Academy’s second option for BSL CLOs was not applicable to MM CLOs and that an analysis of the appropriate thickness attribute for MM CLOs could well result in a different breakpoint than 4%. In response to a comment from Chair Barlow, Mr. Smith stated that he understood that MM CLOs represent only about 20% of insurance company CLO holdings.

Chair Barlow pointed out that the Academy’s recommendations do not include an RBC factor for CLO notes that are designated NAIC 6. He said that one possible approach would be to calculate the NAIC 6 factor as the average of (i) the lowest factor recommended by the Academy for NAIC 5.C CLO notes, and (ii) 100%. He then noted that portfolio adjustment factors and the treatment of residual tranches still needed to be addressed.  

March 23 Discussion of Comments on Proposed Structural Modifications to the Life RBC Calculation for CLOs

Also at the March 23 meeting, Chair Barlow led a discussion of agenda item #2025-22-IRE MOD, outlining structural modifications to the Life RBC “blanks” (i.e., reporting forms), instructions and formulas to articulate with the Academy’s recommendations for the assignment of RBC factors to CLOs. He noted that this proposal had originally been exposed for comment on December 15, 2025, but needed to be modified and re-exposed to add a tranche thickness attribute in the event the RBC IRE WG chooses the Academy’s second option. He explained that this would give the RBC IRE WG flexibility to choose either option, and that if the RBC IRE WG ultimately chooses the first option, then the incremental factor for tranche thickness would simply be filled in as zero. 

As modified, agenda item #2025-22-IRE MOD separates CLOs, collateralized bond obligations (“CBOs”), and collateralized debt obligations (“CDOs”) into a separate reporting column that could be assigned different RBC factors from corporate bonds. It also adds a new Line 7.2 specifically for BSL CLO tranches rated NAIC 2.C or below when the tranche thickness represents 4% or less of the total deal. This modified structure proposal was exposed for a comment period ending April 17, 2026.

April 10 Meeting: Treatment of Residual Tranches

On April 10, 2026, the RBC IRE WG met by videoconference to receive a report from the Academy on the treatment of residual tranches of CLOs. Based on the analysis in that report, the Academy recommended no changes to the current post-tax RBC factor for residual tranches of 35.55%, which equates to a pre-tax RBC factor of 45%. At the request of Chair Barlow, the Academy agreed to provide updated materials at the next meeting, showing examples of its analysis under the two alternative methods for accounting for residual interests.

Timing Expectations from the NAIC Financial Condition (E) Committee

By way of reminder, in 2025, the Financial Condition (E) Committee (“E Committee”) established a number of timing expectations: that any structural modifications to the Life RBC calculation would need to be approved by the RBC IRE WG’s parent task force—the Capital Adequacy (E) Task Force (the “CAD TF”)—by May 15, 2026, and that the actual RBC factors would need to be approved by the RBC IRE WG by June 15, 2026, and by the CAD TF by June 30, 2026, in order for the new structure and factors to become effective on December 31, 2026.

The E Committee stated that if the above deadlines are not met, then the NAIC would expose for comment a proposal to determine RBC by modeling individual BSL CLO deals using a methodology developed by the NAIC’s Structured Securities Group, which would likely result in higher factors than the Academy’s proposals and which, if adopted, could become effective on December 31, 2026.

May 6 Meeting: Airing of a Wide Spectrum of Opinions

On May 6, 2026, the RBC IRE WG met by videoconference to discuss written and oral comments on the Academy’s March 2 presentation regarding potential new RBC factors for CLOs.

Prior to the discussion of comments on the March 2 proposal, the working group received an updated presentation from the Academy on the recommended treatment for residual tranches. The updated presentation included an analysis under both of the alternative statutory accounting methods for residual tranches, and concluded that the current post-tax factor of 35.55% (equivalent to a pre-tax factor of 45%) is within the range of C-1 factors across both accounting methods.

The majority of the May 6 meeting was devoted to a discussion of the 15 comment letters included in the meeting materials, which represented a wide spectrum of views. All but two of the commenters had a representative present to summarize their comment letter, and working group members often asked questions or expressed their own views in response to the comments. 

The commenters fell into a number of different camps, with the key issues of divergence being the following:

• Whether to apply the new factors to both BSL and MM CLOs, or only to BSL CLOs;
• Whether to include tranche thickness as a second comparable attribute in addition to tranche ratings; and
• Whether to apply the new factors in 2026, or delay application until 2027 to allow for additional refinements.

Each comment letter has its own nuances, so placing them in categories does not do justice to the variations among them, but they may nonetheless be classified as follows according to the general approaches for which they advocated:

• Apply the Academy’s model to both BSL and MM CLOs in 2026: Four commenters supported the application of the Academy’s ratings-based model to both BSL and MM CLOs in 2026. Within that group, two commenters were open to also using tranche thickness as a second comparable attribute, but were willing to defer that aspect pending further analysis. One commenter definitely favored deferring that aspect to 2027. One commenter advocated that only the ratings attribute be used, and suggested that a referral be made to the NAIC Credit Rating Provider (E) Working Group to address the interaction between tranche thickness and methodological differences between rating agencies.

• Apply the Academy’s model to BSL CLOs, but not MM CLOs, in 2026: Three commenters supported the application of the Academy’s rating-based model to BSL CLOs in 2026, but not to MM CLOs, which they suggested should continue to be subject to corporate bond factors in 2026. Those commenters urged that data analysis of MM CLOs be performed in order to determine whether the Academy’s framework should be extended to MM CLOs in 2027. Within that group, one commenter supported also using tranche thickness as a second comparable attribute for BSL CLOs; one commenter opposed doing so; and one commenter was agnostic on that point.

• Apply the Academy’s model to BSL CLOs in 2026, but consider differences in the analytical approaches used by different rating agencies: One commenter representing a rating agency supported the application of the Academy’s ratings-based model to BSL CLOs in 2026, but called for the NAIC to consider the differences in analytical approaches among rating agencies. During the discussion, an oral comment from the representative of another rating agency gave listeners the impression that the rating agencies may not agree on how their differing methodologies should be assessed from this perspective.

• Adopt the Academy’s framework only for reporting purposes in 2026, but defer the use of the Academy’s RBC factors until 2027: Three commenters supported the use of the Academy’s model as a disclosure-only approach for 2026, in order to allow time to perform additional sensitivity testing and reduce the risk of unintended volatility or “cliff” effects.

• Do not make the changes recommended by the Academy: Two commenters expressed strong opposition to both the Academy’s recommendations and the RBC IRE WG’s process, and one commenter urged caution regarding adopting the Academy’s proposed framework. All three commenters expressed concerns that increased RBC factors for CLOs would increase costs to policyholders.

The May 6 meeting materials also included three comment letters on the structural modifications to the Life RBC forms. Those comment letters largely dovetail with the substantive positions articulated by the respective commenters on the potential new RBC factors.

Adoption of the RBC Structure Proposal

Following the discussion of the comment letters, Chair Barlow noted that the RBC IRE WG needed to take action on agenda item #2025-22-IRE MOD—which consists of modifications to the structure of the Life RBC reporting forms—in order to enable the CAD TF to adopt those modifications by May 15, 2026, as called for in the E Committee’s timetable.

During the discussion, the Chair clarified that making the structural modifications would not predetermine the outcome of the working group’s continued consideration regarding which aspects of the Academy’s model to adopt for 2026—given that the proposed structural changes were flexible enough to accommodate any of the options under consideration. On that basis, the working group voted unanimously to adopt the structure proposal.

Exposure of a Proposal With Modeled C-1 RBC Factors for CLOs

Chair Barlow pointed out that the agenda for this meeting had contemplated that the RBC IRE WG group would also receive an updated presentation from the Academy regarding portfolio adjustment factors, but that due to the fact that the time allotted for the meeting had expired, that would need to take place at a future meeting.

Finally, Chair Barlow directed the working group’s attention to agenda item #2026-12-IRE, a new proposal that would incorporate into the structure proposal the modeled C-1 factors for CLOs from the Academy’s March 2 presentation. He directed that the proposal be exposed for a 30-day comment period to allow sufficient time for it to be considered, and revised as needed, in time for an eventual adoption by June 15 by the RBC IRE WG, and June 30 by the CAD TF.