US insurance regulators approved new capital rules this month targeting approximately $314 billion in collateralised loan obligations (CLOs) held by insurers, aiming to enhance protection for policyholders.
However, during the four-year rulemaking process, the insurance industry has already identified alternative investment avenues to sidestep these incoming regulations.
Regulatory data shows that from 2018 to 2022, the volume of CLOs held by insurers doubled.
Subsequently, regulators began discussing requirements for insurers holding CLOs to significantly increase capital reserves to guard against potential losses, coinciding with a decline in the yield attractiveness of CLOs.
Insurers have started pivoting towards other debt instruments that share similar risk and return profiles to CLOs but are not subject to the new rules.
During this period, insurers continued to increase their CLO holdings, but the annual growth rate slowed to single digits.
In contrast, the total size of structured securities backed by assets such as student loans, auto loans, and music royalties has maintained a steady annual growth rate of around 10%.
Industry insiders point out that market anticipation of stringent CLO regulation has spurred the creation of other forms of structured securities investment channels.
This dynamic highlights a key reason why major Wall Street private equity firms have been drawn to the life insurance business: unlike bank regulators, state insurance commissioners did not undertake a comprehensive overhaul of capital rules following the 2008-2009 financial crisis.
Currently, insurers controlled by private equity firms such as Apollo and KKR are significant sellers of annuity products.
Given their long-term investment horizons, these entities can invest in complex, high-yield debt, provided regulators do not mandate excessive capital reserves.
However, the pace at which private capital managers create new debt instruments has outstripped the ability of state insurance commissioners to respond, making the regulatory process akin to a game of "whack-a-mole"—as soon as regulators tighten rules on one type of high-risk investment, capital flows elsewhere.
It is estimated that over $1 trillion in US insurer assets are now held in Bermuda.
The National Association of Insurance Commissioners (NAIC) stated that regulators prioritise their work based on the potential impact, scope, and relevance of specific investments to insurers, adjusting their focus as market conditions and risk profiles evolve.
State commissioners could initiate a rulemaking process for non-CLO structured securities as early as this summer.
Athene, the world's largest annuity provider, adjusted its $25 billion CLO portfolio last year while increasing allocations to other types of structured credit.
This included purchasing $676 million in BBB-rated debt instruments from its sister company, Apollo Asset Management.
This instrument is not classified as a CLO and therefore does not require the doubled capital reserves stipulated by the new rules.
The new CLO rules, set to take effect at year-end, are ultimately less stringent than the industry feared in 2022.
An internal memo at that time warned of the need to curb "capital arbitrage," noting that insurers could reduce capital requirements by two-thirds simply by reclassifying investments as structured credit.
Structurally, these securities transform lower-rated debt into higher-rated tranches—the underlying asset pools are typically speculative or junk-grade, but the senior tranches often achieve investment-grade ratings after prioritisation.
The May 2022 memo indicated that if an insurer purchased all tranches of a CLO, the required capital would be only about one-third of that needed to hold the underlying loans directly.
The primary author of that memo later began developing a model for the NAIC to assess CLO risk, but the team's work faced widespread industry criticism.
By late summer 2022, regulators contacted the Society of Actuaries, which commenced an independent analysis of CLOs.
The American Council of Life Insurers lobbied the NAIC to base the new rules on the Society of Actuaries' approach rather than the original team's model.
Analysis suggested the original model could lead to a "significant increase" in capital requirements for A-rated securities, a common rating for insurer-held CLOs.
The rules ultimately approved, however, actually lowered capital requirements for A-rated securities.
The memo's author left the NAIC in November 2025 to join an insurance company.
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