Key Takeaways:
Insurers shifted billions into structured securities beyond regulators' reach during a four-year rule-making process, exposing a regulatory catch-up game that benefits private-equity owned annuity sellers.
The National Association of Insurance Commissioners this month approved capital rules for $314 billion of collateralized loan obligations held by insurers, but the industry had already shifted billions into similar securities beyond the new rules' reach.
"People feared a major crackdown in CLOs and so they created other forms of oftentimes similar structured securities to invest in," said Aaron Sarfatti, former chief risk officer at insurer Equitable and a member of the Federal Reserve's Insurance Policy Advisory Committee.
Insurer CLO holdings doubled from 2018 to 2022, then annual growth slowed to single digits as regulators began crafting the rules. Holdings of non-CLO structured securities — backed by student loans, car payments and music royalties — maintained steady growth of about 10 percent, according to NAIC data. Athene, the world's largest annuity provider, trimmed its $25 billion CLO portfolio last year while adding instruments such as Fox Hedge LP C, a $676 million triple-B rated debt security bought from sister company Apollo Asset Management.
The episode illustrates why private-equity firms including Apollo Global Management and KKR have flocked to the life-insurance business: state insurance commissioners, unlike bank regulators, did not overhaul capital rules after the 2008-09 financial crisis. More than $1 trillion of U.S. insurer holdings are now parked in Bermuda, where capital requirements are even looser. State commissioners could begin rule-making for non-CLO structured credit as early as this summer.
The new CLO rules, which take effect at year-end, turned out far less strict than insurers initially feared. A May 2022 NAIC staff memo flagged "capital arbitrage" — showing an insurer could cut its capital requirement by two-thirds simply by repackaging corporate loans into structured credit. The memo's lead author, Eric Kolchinsky, then director of the NAIC's Structured Securities Group, began developing a risk model that Bank of America analysis predicted would "significantly increase" required capital for single-A rated CLOs, a common insurer holding.
Industry pushback redirected the process. The NAIC turned to the American Academy of Actuaries, a nonprofit whose members include many life-insurance company actuaries, to produce a separate analysis. The American Council of Life Insurers lobbied for the Academy's approach over Kolchinsky's. The final rules, based on the Academy's model, decreased capital requirements for single-A CLO holdings. Kolchinsky left the NAIC in November 2025 for an insurance company.
The Bermuda Bypass
The regulatory arbitrage extends beyond structured credit. More than $1 trillion of U.S. insurers' assets sit in Bermuda-based reinsurance affiliates, where capital rules are lighter than in the U.S. — a structure heavily used by Apollo-controlled Athene and KKR's Global Atlantic. These vehicles allow PE-owned insurers to hold riskier, higher-yielding assets while meeting state capital requirements through intra-group reinsurance.
What Comes Next
State insurance commissioners could open rule-making for non-CLO structured securities as early as this summer, the NAIC said. But the industry's ability to innovate around new rules — and the four-year lag between identifying a risk and implementing a fix — suggests the whac-a-mole dynamic will persist. Total structured credit already makes up about 13 percent of insurer holdings, and some life and annuity companies hold significant concentrations of lower-rated structured debt.
This article is for informational purposes only and does not constitute investment advice.
