Insurers Bet Big on CLOs as NAIC Scrutiny and Tariff Headwinds Loom Large

Reporting: Sid Punjabi

Publicly filing life insurers increased their CLO holdings by $14 billion during the 2024 calendar year, according to data provided to Octus, formerly Reorg, by New Debt Exchange. The asset class accounted for 6.06% of investments on life insurers’ balance sheets by the end of the year, an increase from 5.82% previously, on the basis of the fair value of the holdings.

New Debt Exchange has aggregated life insurance holdings in CLOs broken down by manager and rating, tracking inflows and outflows in 2024 across different CLO platforms.

Life insurers anchor large amounts of new CLO issuance, and with a preference for stable and reputable platforms, the managers they choose to allocate to are often the result of deep due diligence. In aggregate, insurers hold over $250 billion in CLOs, which equates to roughly a quarter of the overall asset class.

“Insurance and insurance-affiliated clients are some of the most sophisticated and established securitized product investors,” said Ronnie Jaber, head of credit at Onex Credit Partners. “They’re pros at relative value analysis across tranches, geographies and asset classes. They can also move quickly and in size, which can give them an edge.”

Publicly Filing Insurers’ Total CLO Holdings by Manager

Source: New Debt Exchange

The floating rate component of CLOs provides an easy way for insurers to generate additional yield while reducing exposure to rate fluctuations, and the ratings on tranches allow these investors to stay within their investment-grade mandate.

“Insurers are looking to invest their premiums to ensure they can fulfill their obligations to policyholders,” said Ian Gilbertson, co-head of U.S. CLOs at Invesco. “The CLO asset class allows insurers to match their risk and expected duration requirements with yield targets that do not expose them to interest rate duration risk.”

The return component, coupled with the structural protections, provides for an even more compelling case for a greater inclusion of CLOs on insurance balance sheets.

“CLOs provide insurers with a unique combination of diversification, attractive return potential, and structural protections, making them a natural fit for balancing yield and capital preservation,” said Adrienne Butler, head of global CLOs at Barings.

Year over year, CLOs are becoming an increasingly large share of the insurance balance sheet. While bond and loan investments for life insurers increased 3.2% from 2023 to 2024, CLOs increased 7.4% during the same period.

“CLOs have become a real mainstay within insurance portfolios,” said Jeannine Heal, head of insurance investment solutions, Americas, at PineBridge Investments. “The relative value and return on regulatory capital that they provide really make sense vis-ȧ-vis high-grade fixed income. Some insurers already have up to mid-teens allocations to CLOs in their portfolios, and an increase amongst other insurers will come as no surprise.”

Physicians Insurance, a Seattle-based firm that provides professional liability to the healthcare industry, has recently begun allocating to CLOs for the first time. The insurer has about $600 million total assets.

“Right now, CLOs allow us to move around slightly outside of high-grade fixed income universe to help generate additional spread without taking on as much duration risk,” said Jason Gingerich, chief financial officer at Physicians Insurance. “Most duration trades fell underwater from the new rate hiking cycle, and Silicon Valley Bank’s failure exposed systemic risk by relying on near-zero rates. Duration risk has proven to be very real, and it’s something we are now hyper-aware of.”

NAIC Scrutiny

The past year has been particularly murky for insurance companies as they try to adapt to the potential of newly proposed National Association of Insurance Commissioners, or NAIC, regulations. The NAIC is mulling changes to the capital treatment for CLOs held by insurers, which could in turn constrain the amount of flexibility each manager has in making their investment decisions.

Due to the different capital treatment of leveraged loan investments on insurance balance sheets versus that of CLO tranches, the NAIC is considering new rules that would cause some CLO tranches to carry a higher capital charge. The regulations, if and when they are finalized, would cause insurance companies to lose the ability to carry single-A and triple-B risk in size and force them to look higher up the CLO capital stack.

“Given that insurers have been steadily increasing their exposure to CLOs over the past decade, the NAIC introduced a stress test specific to CLOs a few years ago to help monitor the industry’s exposure more closely,” Invesco’s Gilbertson said. “This safeguard ensures that the industry doesn’t inadvertently take on too much risk with its investments, potentially creating a systemic risk that could prevent insurers from fulfilling their obligations to policyholders.”

Publicly Filing Insurers’ Triple-A CLO Holdings by Manager

Source: New Debt Exchange

“Given the recent trend of some insurers moving down into lower parts of the capital stack, the NAIC is working with the industry to potentially update the capital requirement framework,” Gilbertson added. “This has caused some insurers to move up the CLO capital stack, where capital charges are likely to remain very manageable. It is still very common to see insurers participating in CLO transactions directly in the triple-A through single-A tranches.”

PineBridge Investments has been at the forefront of the new capital changes as a member of the ad hoc working group with the NAIC.

“The new regulations are attempting to move away from reliance on the rating agencies onto model-based designated charges,” said Helen Remeza, head of insurance investment strategy at PineBridge. “While the top of the capital stack is likely unaffected, and could actually have even more favorable treatment based on the models, the changes are really going to focus on the mezz part of the capital stack.”

Remeza told Octus that insurance companies owned by private equity tend to be more active in the ‘investment grade mezzanine’ tranches and would therefore feel a greater impact from the NAIC’s proposed rules.

“You are also going to see more comment letters to the NAIC get exposed over the next year as the NAIC looks to try and adapt to these changes,” Remeza said, adding that the changes should be finalized by early 2026. “You will not see the true effect of CLO model-based designated changes until 2026 annual filings at the earliest, though, if the regulations are implemented.”

It is a contentious issue among insurance investors, changing how easily they can generate additional yield away from investment-grade bonds and loans.

“The NAIC regulations are certainly going to make it more difficult to pick up yield in lower parts of the cap stack,” said Gingerich of Physicians Insurance. “Getting exposure to individual bank loans takes much more manpower and gets messy on the balance sheet. Tighter regulations will make it harder for constrained capital carriers, but we are willing to work through the uncertainty to take on the yield.”

Publicly Filing Insurers’ Double-A CLO Holdings by Manager

Source: New Debt Exchange

Capital treatment rules surrounding exchange traded funds, or ETFs, mutual funds and private funds are also front and center with these changes. Currently, insurers who hold mutual and private funds of investment-grade fixed income are receiving different treatment than those who own the same assets in ETF-wrappers. CLO ETFs are NAIC-approved, and the resulting capital charges on insurance balance sheets end up being charged as the underlying investment-grade asset, while private and mutual funds do not get the same benefit.

“The harmonization of RBC treatment for ETFs with mutual and private funds is important,” PineBridge’s Remeza said. “That is going to be one of the focal points for these new regulations, especially since smaller insurers often have these funds on their balance sheets. It is important to figure out a way to make the capital charges for the vehicle wrappers equal so there is consistency within the asset class.”

Another effect of the proposed regulations has been CLO capital structures becoming more incremental, with an increase in split senior and junior tranches at the triple-B level in particular.

“We could see more tiering for sure,” Remeza said. “The treatment of a senior triple-B tranche could end up being more favorable, and those who want to attract insurance clients to their structures will likely be more cognizant of that fact. It will definitely start showing up more in different capital structures, especially if the regulations support it.”

Tariffs: The Talk of the Town

The new tariff policy announced by President Donald Trump in April put the CLO investor base on its back foot. Early in the first quarter, liability spreads moved to record tights in anticipation of a pickup in M&A activity and expansionary economic policies expected to be brought in by the new administration.

Instead, M&A activity has dried up, economic growth appears to have slowed and new loan issuance came close to a dead stop. This has left managers in a difficult position as they look to purchase new assets for their CLO vehicles.

The sudden increase in volatility is a contrast from what investors were seeing in the first quarter with triple-A spreads hitting 110 bps.

One CLO manager told Octus that U.S. institutional investors were beginning to chase spreads down below 120, taking the view that the tightening would continue at five to 10 bps a week.

“That turned out to be far from the truth,” the CLO manager said. “Large Japanese investors refused to do deals below 120 bps at that point because the hedging costs based on the JGB 5 year yield of around 90 bps, coupled with a SOFR hedge, was causing their returns to be negligible. Once there was a realization that there were no tighter marginal bids than their own and loan prices were close to 98 cents, the only direction left to go was wider.”

Spreads have since widened out. Tier one managers are now pricing deals back in the 135 bps to 140 bps range, while tier two and three managers are between 10 bps and 20 bps higher.

As secondary volume has picked up, it has become clear that there is a preference for tenured managers, both within the insurance space and among other investors. Second and third order effects of the Trump administration’s tariff policy are not easily visible and continue to be discussed as managers look to rotate their CLO portfolios.

Publicly Filing Insurers’ Single-A CLO Holdings by Manager

Source: New Debt Exchange

For insurance investors, the focus has shifted onto how defensive they should be with their capital.

“Spreads prior to the dislocation were tight, and it seemed foolish to deploy capital at that point for us, especially being smaller than some of the large life insurers,” said Gingerich. “Now, with the new tariff policy, we are in an interesting position. On one hand, there is quite a bit of uncertainty with how policy will move forward, but if the tariffs do get lifted, then the market should fly.”

This thinking has led Gingerich to a middle ground where Physicians Insurance is putting about $40 million of capital to work in the month of May but is still holding out from deploying full scale in hopes that new opportunities will arise.

Jeannine Heal at PineBridge told Octus that her firm saw insurance clients willing to allocate more to CLOs after the recent spread widening.

“The move provided a good opportunity to deploy capital, and we saw a lot of insurance accounts stepping in with new money,” Heal said “The asset class really makes sense within the investment-grade universe, so it was not a surprise that there was more appetite at these higher levels, especially after a period of tightening.”

Active Management and ETFs

As insurance companies eye new CLO issuance amid the volatility, collateral managers are under increasing scrutiny, with tier one managers looking more favorable for investors as the uncertainty grows, according to sources.

“Insurance companies tend to value stability given NAIC capital charge requirements,” said TK Narayan, head of structured products at Oak Hill Advisors. “We believe the demand for CLO debt from insurance companies is tied to the long-term stability that may be provided by CLO platforms that are able to preserve par, resulting in less price volatility and strong ratings stability for the debt.”

Mark Sanofsky, a managing director at CIFC Asset Management, said his firm believes insurance investors value the consistency of their CLOs’ performance.

“Because recessions are rarely caused by the same trigger and are thus unpredictable, CIFC continued to focus in 2024 on defensive positioning of the portfolios away from heavy cyclical names and industries,” Sanofsky said.

The active management value-add question is becoming increasingly prevalent in the industry, with investors asking how much rotation an underlying portfolio should undergo to stay invested without suffering greater losses in the event of a recession or other tail risk events. To make things harder, loan issuance has slowed down considerably, and with large amounts of capital rotating to private credit, the search for quality broadly syndicated loan paper is proving challenging for managers.

“Loan issuance has gotten incredibly difficult to predict for this year,” said another CLO portfolio manager. “There was originally an expectation of huge issuance under the Trump administration with hopes of higher M&A volume to bring new paper to the market, but that is nowhere to be found. Instead, it is becoming harder to stay invested in a risk-adjusted way.

“We have to really think about the impact of tariffs, and the effects can’t always be observed right away,” the manager added. “Is it worth taking a five-point loss this year so you do not have to take a 30-point loss later in 2025 or in 2026 with an LME? It is hard to say, and definitely something we are all thinking about. Position sizing and risk management is at the forefront of our minds.”

Publicly Filing Insurers’ Triple-B CLO Holdings by Manager

Source: New Debt Exchange

ETFs have become an increasingly prevalent way to take a diversified route to active management. They have become popular with insurers, especially given the NAIC approval of certain funds that buy triple-A CLO paper.

Pinebridge is a sub-advisor to the VanEck CLO ETFs, with one of the flagship issues, CLOI, drawing over $1 billion of assets under management, or AUM.

“Some insurers are using ETFs in lieu of money market funds for income,” PineBridge’s Heal said. “It makes a lot of sense from both a liquidity perspective and a capital deployment perspective. Some insurers may not have $75 to $100 million of capital to commit to a separately managed account at a given point in time, so ETFs are an easy way for us to give our clients access to the asset class.”

Outside of ETFs, PineBridge continues to work with insurance clients to come up with solutions in CLOs, which they believe no insurance portfolio should be without.

“We work with clients in a number of different ways – it really all depends on their internal structure and investment objectives and goals,” Heal said. “We have some clients who handle triple-A and double-A tranche investing themselves and then leave the rest of the cap stack to us. For those without internal teams, they seek out an investment partner that really understands and has the capability to invest across the capital stack to take advantage of the full range of opportunities. CLOs are going to be a mainstay, and PineBridge wants to be the leader in insurance related CLO solutions,” Heal said.

Notable Managers

Carlyle Group is the CLO manager with the largest allocation from publicly filing insurers, which have $6.8 billion exposure to the manager, according to New Debt Exchange’s data. Carlyle was followed by Blackstone Credit with $6.7 billion. Both were unchanged in the manager rankings from a year prior.

Barings saw one of the largest capital injections from publicly filing insurance investors in 2024, attracting $1.2 billion to its CLOs. It climbed seven places to rank fifth among CLO managers globally.

“As CLOs have gained momentum with insurance investors over the past two years, we’ve partnered closely with our insurance clients to help them navigate and benefit from this evolving space – drawing on our experience as an issuer, investor, and innovator, including the launch of the first European private credit CLO in 2024,” said Butler.

Much of CIFC’s 2024 activity came in the form of resets, when the platform reset 20 different deals outside of the reinvestment period, largely contributing to the increase in insurance AUM. The firm placed third among CLO managers in terms of allocations from publicly filing insurers, up one spot from a year prior, with $5.4 billion of its paper held by these investors.

“The ability to reset a CLO is largely dependent on the underlying quality of the existing portfolio, as underperforming portfolios with distressed portfolios and outsized losses require materially larger capital injections from CLO equity investors which impacts projected returns, often deterring CLO equity from pursuing the reset,” CIFC’s Sanofsky said.

Onex Credit was another of the biggest beneficiaries of insurance capital in 2024, based on the data from New Debt Exchange, with inflows of $1.3 billion. The firm had one of the biggest increases in overall rankings, moving up 15 spots to rank 21st out of over 150 managers. The manager was also the largest recipient of investment from Janus Henderson’s market-leading CLO ETF JAAA, according to sources.

“We spent the last 18 months positioning for a slower growth environment – rotating our portfolios up in quality, while prioritizing resets of existing deals to make sure we had the necessary flexibility to manage our portfolios,” said Onex’s Jaber.

Invesco, which ranks 30th among CLO managers for publicly filing insurance capital allocations, saw an increase after bringing eight deals to market in 2024, with three new issue U.S. deals and one new issue European deal.

“Invesco manages our US CLOs based on three core investment pillars: defensive positioning, liquid tradable portfolios, and seeking to capitalize on market dislocations,” said Gilbertson. Invesco continues to expect insurers to be a core part of the CLO market and believes that their long-standing track record of performance should continue to contribute to attracting new insurance capital to their platform.