The revisions to this SAP were drafted to ensure the financial modeling guidance summarized in SSAP No. 43R—Loan Backed and Structured Securities reflects the practices as directed by the Purposes and Procedures Manual of the NAIC Investment Analysis Office.
The revisions address modeling for collateralized loan obligations (CLOs). A CLO is a single-issued security backed by a pool of debt. In most instances, a typical CLO is a below-investment grade loan collateralized by a first lien, senior secured, broadly syndicated bank loans (BSLs), as well as middle market loans, or possibly loans taken out by private equity firms to coordinate with leveraged buyouts. CLOs are similar to collateralized mortgage obligations (CMOs), except that the underlying debt is collateralized by a company loan instead of a mortgage. Interest in CLO investments has grown since 2020 as these investments represent enhanced yields to investors, making risk assessment the key for investment advisors and insurance management.
The adopted revisions incorporated changes to add CLOs to the financial modeling guidance and to clarify that CLOs cannot be captured as legacy securities. VOS/TF is still developing the methodology to model CLOs, but guidance that permits the SVO to model CLOs has been adopted and will be followed once CLOs begin to be financially modeled. The adopted interim solution applies to all residual tranches, not just CLOs. As adopted, for reporting as of year-end 2023, the residual tranche base factor will be 30%, with a 15% sensitivity test factor. For reporting as of year-end 2024, the residual tranche base factor will be 45%, with 0% sensitivity test factor (subject to adjustment if base factor is other than 45%).
It’s worth noting that even though the revisions are effective for the 12/31/23 reporting period, modeling results will not be available even for 2024 quarterly reporting; therefore, until current-year modeling information becomes available, the entities will need to follow the established designation procedures: (1) NAIC designation and designation category assigned by SVO must be used; (2) CLOs that are ineligible for modeling but are rated by credit rating provider (CRP) will fall into filing exempt (FE) securities process; (3) CLOs that are ineligible for modeling and are not rated by CRP will be reported as 5.B.GI and disclosed in the general interrogatories.