Insurance Companies and the Growth of Corporate Loans' Securitization

Abstract

Insurance companies nonupled their CLO investments in the post-crisis period. This growth has far outpaced that of loans and bonds and is characterized by a strong preference for mezzanine tranches over triple-A tranches. Conditional on capital charges, insurance companies invest more in bonds and CLO tranches with higher yields. Importantly, they prefer CLO tranches because these carry higher yields relative to bonds. Preferences increased following the 2010 capital regulatory reform, resulting in insurance companies holding 40 percent of outstanding mezzanine tranches. Insurance companies contributed positively to CLOs’ equity returns and played a critical role in the rise of loan securitization.

Keywords: insurance companies, CLOs, regulatory arbitrage, corporate loans, securitization

JEL Classification: G11, G20, G22