NAIC Working Group Receives Progress Report From The American Academy Of Actuaries On RBC For CLOs

On March 2, 2026, the NAIC Risk-Based Capital Investment Risk and Evaluation (E) Working Group ("RBC IRE WG") met to receive the latest progress report from the American Academy of Actuaries ("Academy"), which included proposed new risk-based capital ("RBC") factors for BSL CLOs that the Academy has derived from its analysis of the entire universe of BSL CLOs held by US insurers.

By way of reminder, the timeline set last year by the NAIC Financial Condition (E) Committee ("E Committee") calls for the RBC IRE WG to expose proposed RBC factors for CLOs for comment no later than April 30, 2026, and to adopt factors no later than June 15, 2026, thus enabling the NAIC Capital Adequacy (E) Task Force to adopt the factors no later than June 30, 2026, in order for those factors to become effective on December 31, 2026. In the event the June 30 deadline is not met, the E Committee's timeline provides for the individual CLO modeling methodology developed by the NAIC Structured Securities Group ("SSG") to be exposed for comment in June or July of 2026, with a view toward making that individual modeling regime effective on December 31.

Because of the above timeline set by the E Committee, it is quite significant that the Academy was able to present such an advanced progress report at the March 2, 2026 RBC IRE WG meeting.

The March 2 meeting materials can be found:

• The Academy's 03-02-26 Presentation to RBC IRE WG (exposed for comment until 04-16-26)
• RBC IRE WG 03-02-26 Meeting Materials.pdf (includes comments from interested parties on the Academy's prior presentation on 12-15-25)

A key finding of the Academy's March 2 report is that credit ratings include substantial information on tail risk so that such ratings can serve as a comparable attribute when appropriate adjustments are made for horizon and tranche thickness. The results of the Academy's modeled RBC factors are broadly consistent with the work done by the SSG, showing low risk for senior CLO tranches but potential cliff risk for junior CLO tranches. Accordingly, the Academy's recommended RBC factors for the most senior CLO tranches (A/A2 and above) are lower than the current bond RBC factors, whereas the recommended RBC factors for tranches below investment grade are significantly higher than the current bond RBC factors.

For CLO tranches rated BBB/Baa3 and below, the Academy presented two options. The second option, which would impose higher RBC charges if the thickness of the tranche represents 4% or less of the deal, drew a number of questions at the meeting (including that tranche thickness is not currently a reported field in the statutory investment schedules). One possible approach suggested at the meeting was that the RBC IRE WG could adopt the simpler option 1 for 2026 and consider option 2 for possible adoption in 2027 as part of a "phase 2," during which the RBC IRE WG could also address issues that the Academy has not had sufficient time to address in this year's time frame: recoveries, prepayments and default probabilities—plus the treatment of middle market CLOs, which are not included in the work the Academy has done to date.

At the conclusion of the March 2 meeting, the RBC IRE WG exposed the Academy's presentation for a 45-day comment period ending on April 16, 2026. There will also be further discussions on this topic when the RBC IRE WG meets on March 23 at the NAIC Spring National Meeting in San Diego.

While a number of details remain to be worked out, there is a general feeling now that the Academy's work has progressed to the point where the timetable established by the E Committee is capable of being met; i.e., that the Academy's proposed new method of assigning RBC factors to BSL CLOs could potentially be adopted by June 30, 2026 and become effective on December 31, 2026.