Insurance Companies and the Growth of Corporate Loans' Securitization

66 Pages Posted: 9 Aug 2021

See all articles by Fulvia Fringuellotti

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Date Written: August 2021

Abstract

We show that insurance companies have almost nonupled their investments in collateralized loan obligations (CLOs) in the post-crisis period, reaching total holdings of $125 billion in 2019. The growth in CLOs’ investments has far outpaced that of loans and corporate bonds, and was characterized by a strong preference for mezzanine tranches rated investment grade over triple-A rated tranches. We document that these phenomena reflect a search for yield behavior. Conditional on capital charges, insurance companies invest more heavily in bonds and CLO tranches with higher yields. Preferences for CLO tranches derived from tranches’ higher yields relative to bonds with the same rating, and increased following the 2010 capital regulatory reform, resulting in insurance companies holding more than 40 percent of mezzanine tranches outstanding in 2019. In the process, insurance companies created the demand for the risky tranches that are critical to the CLO issuance.

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

JEL Classification: G11, G20, G22

Suggested Citation

Fringuellotti, Fulvia and Santos, João A. C., Insurance Companies and the Growth of Corporate Loans' Securitization (August 2021). FRB of New York Staff Report No. 975, Available at SSRN: https://ssrn.com/abstract=3899341 or http://dx.doi.org/10.2139/ssrn.3899341

Fulvia Fringuellotti (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
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United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

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Portugal

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