NAIC C-1 Vote Reshapes Annuity Spread Pricing for Life Insurer CLO Holdings

On June 23, 2026, the NAIC RBC Investment Risk and Analysis Working Group voted to adopt new C-1 capital factors for life insurer CLO investments, effective December 31, 2026. The decision raises thin BBB- tranche charges from 2.168% to 15.048% pre-tax while cutting AAA tranche factors by 77%, from 0.158% to 0.036%. For annuity pricing actuaries, the shift does not just affect the capital model; it forces a repricing of the investment spread architecture that determines every credited rate, cap rate, and option budget filed in 2027 (NAIC RBC Investment Risk and Analysis Working Group, June 2026).

What the Working Group Adopted

The working group voted for Option 2, the approach recommended by the American Academy of Actuaries Life RBC Committee, with one modification: the NAIC 1.G factor covering A3/A- rated tranches was set at 0.966% pre-tax rather than the Academy's recommended 1.743%, placing it 5 basis points below the existing 1.016% factor. Every other tier moved sharply in the direction the Academy recommended. Pending approval by the Capital Adequacy Task Force on June 30 and the plenary on July 8, these factors become the statutory RBC baseline for December 31, 2026 annual statements (Mayer Brown client alert, July 2026).

The new factor schedule, compared to current factors, is material across the rating distribution:

NAIC Designation	Rating Equivalent	Current Factor (pre-tax)	New Factor (pre-tax)	Change
1.A (AAA)	AAA	0.158%	0.036%	-77%
1.C (AA)	AA	0.523%	0.048%	-91%
1.G (A3/A-)	A-	1.016%	0.966%	-5 bps
2.A (BBB+)	BBB+	1.261%	2.175%	+73%
2.B (BBB)	BBB	1.523%	3.245%	+113%
2.C thick (BBB-)	BBB-, thick tranche	2.168%	3.281%	+51%
2.C thin BSL (BBB-)	BBB-, thin tranche, BSL CLO	2.168%	15.048%	+594%
Residual (equity)	CLO equity	45.0%	45.0%	unchanged

The bifurcation between thin and thick 2.C tranches is the actuarially consequential detail. Two positions with the same NAIC 2.C designation now carry factors of 15.048% versus 3.281%, a 4.6x spread, based solely on whether the tranche thickness exceeds 4% of the CLO's capital structure. The investment spread model must now stratify CLO holdings by both rating and tranche thickness to produce an accurate C-1 charge. Carriers that have historically logged all NAIC 2.C positions at a single blended factor will need to reclassify their Schedule D CLO inventory before the December 31 filing date.

The Spread Pricing Build-Up and Where C-1 Fits

Annuity pricing in the life context uses a credited-rate build-up that starts with the gross yield on the backing asset portfolio and strips out each cost layer to arrive at the maximum credited rate or, for FIA products, the available option budget. The structure is: Gross Asset Yield minus Credit Loss Assumption minus Reinvestment Risk Reserve minus C-1 Capital Charge minus ALM and Expense Load minus Profit Margin equals Maximum Credited Rate. The C-1 Capital Charge equals the book value of the CLO position multiplied by the NAIC C-1 factor, multiplied by the carrier's internal cost of capital.

At a 10% cost of capital, a $500 million portfolio of NAIC 2.B (BBB) CLO tranches generated an annual C-1 charge of $500M x 1.523% x 10% = $761,500, equal to roughly 15 basis points on the portfolio. The same portfolio under the new factors carries $500M x 3.245% x 10% = $1,622,500, or approximately 32 basis points. That 17-basis-point increase flows directly into the spread build-up as a higher cost layer, compressing the maximum credited rate by the same amount unless offset elsewhere in the model.

The comparison is starker for thin BBB- holdings. A $100 million position in a thin BSL CLO tranche currently costs the carrier $100M x 2.168% x 10% = $216,800 per year, or about 2 basis points of annual drag on that position. After December 31, the same position costs $100M x 15.048% x 10% = $1,504,800 per year, or roughly 150 basis points. The incremental C-1 carry rises by $1,288,000 annually, a 129-basis-point increase in the cost of holding that $100M position. Carriers with meaningful thin-tranche BSL exposure are not looking at a rounding-error adjustment; they are looking at a fundamental repricing of whether those positions belong in an annuity backing portfolio at all.

Portfolio Rotation: The BBB-to-AAA Break-Even

The AAA and AA factor reductions create the obvious rotation trade: sell mezzanine CLO positions, reinvest in senior tranches. The economics turn on whether the C-1 capital savings from moving up the stack offset the gross yield given up by exiting BBB exposure.

Under the old factor regime, rotating a $500 million portfolio from BBB CLOs (1.523%) to AAA CLOs (0.158%) generated annual C-1 savings of $500M x (1.523% - 0.158%) x 10% = $682,500, or about 14 basis points. If the gross yield on AAA CLOs runs 100 to 150 basis points below BBB CLOs, the C-1 relief covered roughly 9 to 14 cents on the dollar of that yield give-up. The rotation made sense only at carriers with high internal cost-of-capital hurdles.

Under the new factors, the same rotation generates $500M x (3.245% - 0.036%) x 10% = $1,604,500 in annual C-1 savings, or about 32 basis points. Against a 100-to-150-basis-point gross yield differential, the C-1 relief now covers 21 to 32 cents on the dollar. The break-even threshold has moved by roughly 18 basis points, meaning carriers that previously found the AAA rotation uneconomic should now rebuild that analysis from scratch. At cost-of-capital assumptions above 12% to 15%, a substantial portion of that yield give-up is recovered through capital relief, particularly for carriers with large annuity balance sheets where the absolute dollar scale of C-1 savings amplifies the per-basis-point calculus.

For thin BBB- positions, the arithmetic is decisive. A rotation from $100M in thin BSL BBB- tranches to AAA saves $100M x (15.048% - 0.036%) x 10% = $1,501,200 annually, or about 150 basis points on that position. If the gross yield premium for holding thin BBB- over AAA is 175 basis points or less, the capital-adjusted return of the AAA position exceeds the thin BBB- after December 31. Most carriers will find the risk-adjusted economics of thin-tranche BSL exposure untenable under the new regime.

FIA Option Budget: Quantifying the Cap Rate Sensitivity

Fixed indexed annuity pricing translates the above arithmetic into an option budget: the margin available to purchase the call-spread structure that funds policyholder crediting. The option budget equals Net Investment Margin minus Floor Rate minus Required Spread. Compressing NIM by reducing credited-rate capacity directly reduces the option budget, which either shrinks the cap rate offered to policyholders or forces the carrier to accept lower spread.

Consider a representative 5-year FIA block with $1 billion in backing assets, 60% allocated to CLOs ($600 million). Assume that $300 million sits in NAIC 2.B (BBB) tranches and $100 million in thin BSL BBB- tranches (2.C), with the remaining $200 million in AAA senior tranches. At a 10% cost of capital, the current C-1 charge on the CLO portfolio is:

BBB: $300M x 1.523% x 10% = $456,900. Thin BBB-: $100M x 2.168% x 10% = $216,800. AAA: $200M x 0.158% x 10% = $31,600. Total: $705,300, equal to 7 basis points annually on the $1 billion block.

Under the new factors, assuming no portfolio changes before December 31:

BBB: $300M x 3.245% x 10% = $973,500. Thin BBB-: $100M x 15.048% x 10% = $1,504,800. AAA: $200M x 0.036% x 10% = $7,200. Total: $2,485,500, equal to nearly 25 basis points on the block.

The C-1 charge nearly triples, rising from 7 to 25 basis points annually. Every basis point of additional C-1 charge that flows into the spread build-up reduces the option budget by the same amount. An 18-basis-point compression of the option budget on a 5-year S&P 500-linked FIA, at current implied volatility, translates to approximately a 15-to-20-basis-point reduction in the competitive cap rate the carrier can offer at its target spread. Carriers currently pricing with thin FIA margins will face a choice between cap rate reductions that erode distributor competitiveness, spread compression that erodes profitability, or portfolio rotation that costs gross yield in the near term.

The portfolio rotation choice is real but not costless. If the carrier rotates all $100 million of thin BBB- exposure to AAA and moves the $300 million BBB book to AA-rated senior tranches, the new CLO portfolio earns perhaps 100 to 130 basis points less in gross yield on those positions, costing $400M x 1.15% = $4.6 million annually, or 46 basis points on the block. The C-1 savings from that rotation bring the capital charge down to roughly 1 basis point. Net of the C-1 relief, the annual carry on that rotation costs 46 minus 24 = 22 basis points: worse on paper than the original 7-basis-point C-1 charge, but far better than absorbing the 25-basis-point charge on an unreformed portfolio. The carrier's actual calculus depends on its IPS constraints, the liquidity available to execute the rotation before year-end, and whether its cost-of-capital hurdle sits closer to 10% or 15%.

In-Force Block Considerations

New-business pricing decisions can be implemented at the next product filing. In-force blocks are more constrained. A carrier whose investment policy statement authorized meaningful BBB CLO or thin BSL exposure when the original pricing was filed must now determine whether the post-December 31 C-1 increase erodes originally-priced spread sufficiently to trigger a formal repricing review.

For products with discretionary elements (FIA cap rates, credited rate adjustments on MYGA renewals), the carrier has operational levers to absorb the C-1 increase at the next reset. The repricing shows up in the renewal cap rate rather than in a formal product filing. For products without discretion, including certain older multi-year guaranteed annuity blocks where the credited rate is locked for the contract term, the C-1 increase is absorbed entirely in spread, compressing the retained margin below the originally-priced level for the remaining contract duration.

PE-affiliated carriers whose CLO managers pass residual interests to the insurer face no relief from the vote: the 45% residual factor is unchanged. CLO equity positions remain the most capital-intensive asset class in the life insurer book, and the new factors do nothing to change that calculus. Carriers using affiliated CLO structures should expect continued regulatory scrutiny on whether the economic substance of those arrangements justifies the associated capital treatment.

The Capital Adequacy Task Force vote on June 30 and the plenary vote on July 8 represent the final procedural steps before the December 31 effective date. Pricing actuaries working on 2027 product filings, portfolio optimization reviews, and year-end statutory capital projections need the new factors in their models now, not after the regulatory calendar clears.