NAIC Life RBC Approaching the Finish Line

Research evidence excerpt

NAIC Life RBC Approaching the Finish Line

Idea

July 13, 2026 11:00 AM GMT

Morgan Stanley & Co. LLCMGlobal CLOs | North America Joyce Jiang

Strategist

NAIC Life RBC Approaching the Joyce.Jiang@morganstanley.comGabriel Reyes Esclasans +1 212 761-0165

Gabriel.Reyes.Esclasans@morganstanley.com +1 212 761-4134

Finish Line James Egan

James.F.Egan@MorganStanley.com +1 212 761-4715

The revised Life RBC framework strengthens insurers'

preference for senior CLO tranches while reducing the capital

efficiency of BBB and lower-rated debt. We expect the resulting

shift in demand to reinforce a steeper CLO credit curve.

Key Takeaways

The National Association of Insurance Commissioners (NAIC) has taken the final

major steps toward implementing its revised risk-based capital (RBC) framework

The new framework reduces RBC factors for AAA to A tranches while increasing

capital charges for lower-rated tranches in US BSL and PC CLOs, and with

additional charges for thinner tranches in BSL CLOs.

We estimate the new framework increases the capital requirement for life

insurers' CLO holdings by 106bp, driven entirely by materially higher capital

charges on BBBs and below.

Assuming a 400% RBC ratio and a 10% return on capital, the cost of capital more

than offsets the incremental spread pickup for BBBs and below, reducing their

capital efficiency.

Insurers account for an estimated ~40–50% of the AA, A and senior BBB market,

making their portfolio rebalancing potentially meaningful for spreads. In contrast,

we expect repricing in junior BBB and BB tranches to be more limited and

confined to deals with large insurance ownership.

We expect insurers to reallocate toward senior tranches while reducing exposure

to BBBs and BBs over time. The resulting portfolio rebalance should lead to a