Insurance regulators this month approved rules that aim to protect policyholders against big losses on a $314 billion slice of structured debt held in insurers' portfolios.

But by the time they completed the four-year rule-making process, the insurance industry had found ways around those rules.

The regulations govern collateralized loan obligations, funds backed by pools of corporate debt from junk-rated companies. They were all the rage until just a few years ago, according to National Association of Insurance Commissioners data. Insurer holdings doubled from 2018 to 2022. Then regulators started talking about making insurers with CLOs hold a lot more money in reserve to protect against the risk of loss. Around the same time, CLO interest rates also grew less appealing.

Insurers started favoring other debt instruments that featured the same potential (and potential risks) as CLOs, but wouldn't be subject to the new rules. They were still adding CLOs, but the yearly growth rate fell into the single digits, while the rate of increase remained steady -- around 10% -- for total structured securities, including those backed by student loans, car payments, music royalties and other assets.

"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.

The episode illustrates a big reason Wall Street's private-equity titans have flocked to the life-insurance business in the first place: Unlike the bank regulators, the state commissioners overseeing insurers didn't overhaul their capital rules in the wake of the 2008-09 financial crisis.

Today, insurers controlled by Apollo, KKR and other private-equity firms are big sellers of annuities, the retirement products that require upfront payments in exchange for income in the future. Because they hold that cash for long periods, the firms can invest profitably in complex, high yielding debt -- as long as regulators don't require them to hold too much money in reserves.

But private money managers have been conjuring up new debt instruments faster than thinly stretched state insurance commissioners can rein them in, and the regulatory process sometimes resembles a game of whac-a-mole. By the time regulators clamp down on a specific flavor of risky investing, the money has already moved elsewhere. Sometimes literally: More than $1 trillion worth of U.S. insurers holdings is parked in Bermuda.

The American Council of Life Insurers, an industry group, said that what attracts big money managers to the life-insurance business "has more to do with the natural fit between long-term liabilities and long-term investment grade assets" than anything about the regulatory process. The group noted that CLO growth had slowed somewhat even before the NAIC's rule-making got started.

Total structured credit makes up about 13% of insurer holdings and while some life and annuity insurers hold very little, others hold significant concentrations of lower-rated structured debt.

The National Association of Insurance Commissioners, which comprises the top insurance regulators in every state, said in a statement that "regulators prioritize their work based on the potential impact, scope, and relevance of specific investments to insurers...and adjust their focus as market conditions and risk profiles evolve." State commissioners could choose to start the process of setting rules for non-CLO structured securities as early as this summer.

Athene, the world's largest provider of annuities, cited falling interest rates relative to Treasurys as its reason for trimming its $25 billion CLO portfolio last year while adding other types of structured credit -- such as a $676 million triple-B rated debt instrument known as Fox Hedge LP C, bought from sister company Apollo Asset Management. But there is another advantage to the fact that Fox Hedge isn't a CLO: If it were, Athene would soon have to start holding twice as much money in reserves for that particular instrument.

Still the new CLO rules, which take effect at year-end, haven't turned out to be nearly as strict as insurers feared back in 2022, when a memo by an NAIC staffer warned of the need to clamp down on "capital arbitrage." It showed that an insurer could cut its capital requirement by two-thirds just by rearranging an investment into structured credit.

In one sense, structured securities transform lower-rated debt into higher-rated debt. The underlying pool of assets -- be they loans to companies or student debt -- are often speculative grade or junk. But they are packaged into different tranches in order of who will get repaid first if the money dries up. The top tranches are often rated investment grade. The NAIC memo in May 2022 showed that an insurer who bought all the tranches of a CLO would need to hold about one-third the amount of capital as if they simply held the underlying loans directly.

The lead author, Eric Kolchinsky, then director of the NAIC's Structured Securities Group, began developing a model to assess CLO risk to help the NAIC come up with new capital requirements. But his team's work came under broad criticism from industry, according to people familiar with the process.

By the end of summer 2022, regulators had reached out to the American Academy of Actuaries, a nonprofit group that comes up with standards for the actuarial profession -- and includes many actuaries working at life insurance companies. That group began work on a separate CLO analysis. The American Council of Life Insurers lobbied the NAIC to base the new rules on the American Academy of Actuaries' approach rather than that of Kolchinsky's team.

An analysis by Bank of America head of CLO research Pratik Gupta suggested why: Kolchinsky's model, he found, was likely to lead to "a significant increase" in required capital for securities rated single-A -- a common rating for insurer CLOs. The rules the working group eventually approved -- the ones based on the American Academy of Actuaries' model -- decreased capital requirements for single-A holdings.

The American Council of Life Insurers said in a statement that it supported the American Academy of Actuaries' effort because it was a "transparent and data-driven approach" based on "actual risk." Kolchinsky left the NAIC for an insurance company in November 2025.

Write to Heather Gillers at heather.gillers@wsj.com

(END) Dow Jones Newswires

July 20, 2026 20:00 ET (00:00 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.