The National Association of Insurance Commissioners recently released a document warning about fast-growing financial structures used by private equity groups like Apollo Global Management and KKR, focusing on risks related to "circular ownership" and opaque holdings.
While the association itself is not a regulatory enforcement body, state insurance officials participate in its meetings and coordinate industry standards, including capital requirements insurers must hold to fulfill policyholder obligations. These investment tools, known as multi-asset securitizations, typically package small layers of fund shares, with underlying assets spanning credit card debt, mortgages, private equity fund stakes, and direct loans to mid-sized companies.
Asset managers marketing this rapidly growing new financial sector emphasize its yield advantages over traditional structured debt, while still securing high-grade credit ratings from major rating agencies. Life insurers, aiming to match decades-long policy commitments, are actively studying and investing in such securitized products to boost returns on annuities sold to retirees.
According to the document released before the association's summer meeting, regulators are concerned about the complexity and lack of transparency of these products, as well as the potential to create "interconnectedness" across different insurers' balance sheets. The document notes that although multi-asset structures sometimes have higher-quality collateral than similarly rated credit products, these assets "are more likely to create interconnections within and between insurer portfolios."
Insiders reveal that the association's working group is focusing on multi-asset preferred securities designed by Apollo for its insurance arm, Athene, as well as securitized assets and private equity funds like "Thunderbird" and "Lightning," which KKR invested in for its insurer, Global Atlantic. Regulators are particularly concerned about potential circular ownership risks, where, due to the complex interconnections of products, insurers may inadvertently hold a more concentrated exposure to certain assets than they realize.
The document provides an example: "A multi-collateral structure may invest in an asset that, in turn, holds investments in that same multi-collateral structure, creating circular ownership." As this asset class continues to grow, regulators believe the risk of "independent vehicles investing in the same assets or investing in each other" is increasing. Furthermore, regulators have found that some insurers have purchased investment products with maturity mismatches, where the structure promises decades-long returns but relies on underlying assets that mature in years or decades, raising questions about finding equally profitable investment sources in the future.
In a statement, an Apollo spokesperson said its multi-asset securities products hold a diversified portfolio of assets, feature high-rated collateral with low leverage, and have undergone regulatory review, emphasizing that the products bring transparency and returns to the market. KKR declined to comment. The association's working group stated it is preparing to require more detailed disclosure of underlying asset information for such products.
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