The American Academy of Actuaries has put modelled C-1 factors for CLO tranches in front of the NAIC's RBC Investment Risk and Evaluation Working Group, discussed at the Spring 2026 National Meeting in Kansas City. Below-investment-grade charges would run from 12.59% to 70.82% against current bond factors of 4.60% to 23.00%.

Senior tranches move the other way. The framework does not raise CLO capital across the board; it stops treating a CLO tranche as a bond of the same rating, and the difference lands almost entirely at the bottom of the structure.

Key Takeaways

  • Caa and below would carry a 70.82% factor against an approximate 23.00% current bond factor, while Aaa falls from 0.40% to 0.03%, so the proposal cuts senior charges and multiplies junior ones.
  • A thin Baa tranche is charged 12.52% against 2.73% for a thick one, a 4.6x penalty for structural thinness alone, triggered below 4% of deal capital structure (the NAIC is also considering 4.25%).
  • The modelling covers over 2,600 broadly syndicated loan CLO deals on a CTE(90) basis running 10,000 default and recovery scenarios, consistent with the existing C-1 bond factor methodology.
  • PE-owned annuity platforms allocate roughly 25% of invested assets to CLOs and ABS against 10-15% at traditional mutual life insurers, which is why the same factor set produces very different balance-sheet outcomes.
  • Middle-market CLOs, about 20% of the universe, are excluded from the modelling because their underlying loans are unrated, and no timeline for filling that gap has been announced.

What the Academy Actually Proposed

Two alternative factor sets went to the working group. The first uses ratings alone. The second adds tranche thickness for tranches rated Baa3 and below. Both run CTE(90) over 10,000 default and recovery scenarios across more than 2,600 BSL CLO deals, deliberately matching the methodology behind the existing C-1 bond factors.

Rating Category Proposed C-1 Factor (Ratings Only) Current Bond Factor (Approximate) Ratio: Proposed vs. Current
Aaa 0.03% 0.40% 0.08x (lower)
Aa 0.06% 0.40% 0.15x (lower)
A 0.14% 0.75% 0.19x (lower)
Baa (thick tranche) 2.73% 2.00% 1.4x
Baa (thin tranche, <4%) 12.52% 2.00% 6.3x
Ba 12.59% 4.60% 2.7x
B ~35% 10.00% 3.5x
Caa and below 70.82% 23.00% 3.1x

The investment-grade result is the one that surprises. Aaa through A factors land below current bond factors for comparable ratings, which the Academy attributes to structural protections a corporate bond does not have: overcollateralization, interest coverage triggers, waterfall priority, and diversification across 150 to 300 underlying leveraged loans.

Below investment grade the same structure works against the holder. Those protections are funded by the junior tranches, so small movements in portfolio default rates produce disproportionate principal impairment, and the CTE(90) tail picks that up. Mayer Brown's summary of the progress report notes the Academy has not yet addressed recoveries, prepayments, stressed default probabilities, or middle-market deals.

Where the Thickness Adjustment Lands on Surplus

The design choice with the largest balance sheet consequence is the thickness multiplier, because it is not a rating question.

A Baa3 tranche at 8% of a deal's capital structure absorbs eight cents of collateral loss per dollar of deal notional before writedown. The same rating on a 3% tranche absorbs three cents. Under Option 2 the thin tranche is charged 12.52% against 2.73% for a thick one, so identical ratings differ by 4.6x on structural position alone.

Scale that against a portfolio. Take a PE-backed life insurer with $80 billion in general account assets, 25% in CLOs and structured credit, of which 15% sits in below-investment-grade tranches or thin mezzanine positions. That is $20 billion of structured credit and $3 billion of exposed tranches.

At current bond factors averaging roughly 5% across that mix, the C-1 charge is $150 million. At proposed factors averaging 30%, blending Ba at 12.59%, B near 35%, and thin Baa at 12.52%, it is $900 million. The $750 million increase is worth roughly 200-300 basis points of RBC ratio, which takes a carrier running at 350% company action level down toward 300% and into a different supervisory conversation.

Concentration is why this is not a uniform industry event. PE-owned annuity platforms run about 25% of invested assets in CLOs and ABS against 10-15% at traditional mutuals; Athene holds roughly 25% of cash and investments in CLO and ABS positions, up from 10% a decade earlier, and Global Atlantic carries comparable Schedule D concentrations totalling approximately $24 billion. The same factor table produces a 4x to 6x difference in absolute capital increase between the two groups.

The proposal also creates a clear direction of travel. Because Aaa through A factors fall below current bond factors, the framework pays carriers to move up the capital structure, at the cost of the spread that made the allocation attractive.

The Part the Model Does Not Cover

Two gaps sit between the proposal and a year-end number, and both fall on the appointed actuary rather than the regulator.

The first is middle-market CLOs, roughly 20% of the CLO universe and excluded from the Academy's work because their underlying loans are unrated and lack the default and recovery data BSL pools provide. Several PE-backed life insurers hold meaningful middle-market exposure through affiliated managers who originate those loans.

With no factors and no announced timeline, those positions default either to BSL factors calibrated on different collateral, or to collateral loan factors running from 6.8% to 30% depending on structure. Neither is a considered answer, and the choice materially changes a capital projection.

The gap compounds with the private rating letter rule. Many middle-market tranches carry private ratings precisely because the pools lack observable pricing and default data, and the 90-day rationale report requirement adds documentation without resolving whether a private rating captures tail risk in an illiquid pool.

The second gap is sequencing. The structural RBC instruction changes need adoption in time for a December 31, 2026 effective date, while the factors themselves can be adopted later under the existing framework. J.P. Morgan Asset Management flagged that this permits continued debate on calibration after the framework is locked. The practical result is a year-end 2026 RBC projection built on a known calculation and unknown inputs, with a 4.6x thickness multiplier sitting inside the range of possible answers.

Further Reading

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