What You Need to Know
- Insurer investments in corporate bonds rose to $1.8 trillion, from $1.1 trillion, between 2009 and 2019.
- Insurer CLO investments increased to $125 billion, from $13 billion, over that same period.
- Capital rules have discouraged banks from investing in CLO tranches that are not rated triple-A.
Temporary differences between how bank regulators and insurance regulators treated collateralized loan obligations caused CLO exposure to flow into U.S. insurers from 2010 through 2019, according to Fulvia Fringuellotti and João A. C. Santos.
Fringuellotti and Santos — analysts at the Federal Reserve Bank of New York — look at the impact of risk classification differences in a new paper.
Fed interest in insurance company investments could eventually lead to changes in how regulators count insurance company assets.
Any changes in how regulators count insurance company assets could affect life and annuity product features and prices.
A CLO is a security backed by a group of loans. The investment bankers who create a CLO can divide the CLO into different “tranches,” or slices. The tranches determine which investors get paid first. If many borrowers default, holders of the riskiest tranches may get much less cash back than they had expected.
U.S. insurers typically emphasize that they invest only in CLOs with strong, investment-grade ratings.
The New York Fed analysts note that U.S. insurers’ CLO holdings increased to $125 billion in 2019, from $13 billion in 2009.