NEW YORK — Life insurers that built a profitable niche buying collateralized loan obligations, or CLOs, are seeing that edge fade in early 2026. Demand has compressed the spreads CLOs pay, even as leveraged-loan defaults remain elevated and regulators revisit the capital rules that helped lure insurers into the market, Feb. 2, 2026.
CLOs bundle floating-rate corporate loans — many used to fund private-equity buyouts — and repackage the cash flows into layers, or tranches, that range from AAA-rated notes down to equity. The structure can deliver higher income than similarly rated bonds, but the trade is increasingly sensitive to two moving targets: how cheaply managers can fund new deals and whether loan losses keep eating into the lower slices of the stack.
Why CLOs powered insurers’ returns
The U.S. CLO market has grown into a major funding channel for lower-rated companies and a meaningful holding for annuity-heavy insurers. A Reuters Breakingviews column put the market at about $1.4 trillion and described insurers’ holdings rising from roughly $13 billion in 2009 to about $277 billion in 2024.
A National Association of Insurance Commissioners report pegged U.S. insurers’ CLO exposure at $276.8 billion at year-end 2024, with about 40% in AAA tranches and a growing share in lower-rated slices. It also found that private-equity-owned insurers accounted for roughly $59 billion of total CLO exposure, a segment that has attracted extra scrutiny because portfolio risk can vary widely by firm.
The buildout has been years in the making. In a 2025 Federal Reserve note, researchers showed life-insurer-affiliated managers’ share of broadly syndicated loan CLOs hovering near 19% from 2011 to 2016 before climbing to a peak of 36% in 2022.
Spreads plunge as defaults linger
What insurers earn on CLOs depends on the spread — the extra interest a tranche pays over a benchmark rate — and that cushion has thinned. Reuters cited Nomura data showing spreads on AAA CLO debt down about 49% from a late-2023 peak, with AA and BBB tranches tightening even more.
Meanwhile, borrower stress has been slow to clear. Reuters cited Moody’s issuer-weighted default rate on U.S. leveraged loans near 6% in December after topping 7% earlier in 2025, and pointed to blowups such as auto-parts supplier First Brands hitting large numbers of CLO portfolios. Fitch expects pressure to ease but not vanish, projecting 2026 leveraged-loan default rates of 4.5% to 5.0% in January research.
A familiar regulatory question returns
This is not the first time CLOs have cycled from “smart yield” to “too crowded.” During the pandemic-era yield hunt, AM Best wrote in 2021 that insurers’ exposure looked manageable at an industry level, while warning that downgrades could hurt firms with outsized positions.
Earlier, a 2020 NAIC special report said insurers’ CLO exposure jumped nearly 23% to $192.9 billion at year-end 2020. By mid-2022, the NAIC was debating whether to move toward cash-flow modeling for risk-based capital — a shift outlined in a MetLife Investment Management analysis.
For insurers, the near-term question is less about whether CLOs belong in portfolios and more about where to sit in the stack. If spreads stay tight, the temptation to lean into lower-rated CLOs for yield rises. If defaults remain sticky, those same tranches are first in line to absorb losses — and the margin for error gets smaller.
