US insurance regulators scrutinise KKR and Apollo-backed structured investment vehicles

US insurance regulators are intensifying their examination of intricate structured investment products crafted by private capital entities, cautioning that their increasing incorporation into insurers' balance sheets may introduce concealed risks, according to a report by the Financial Times. The concerns, revolving around transparency, interlinked ownership, and long-term performance, were delineated in papers prepared for forthcoming assemblies of the National Association of Insurance Commissioners (NAIC), the entity tasked with formulating insurance regulatory norms across US states.

Although the NAIC does not directly oversee insurers, its counsel frequently molds capital and disclosure prerequisites embraced by state regulators. The investigation zeroes in on multi-asset securitisation frameworks, a burgeoning segment of the private markets that aggregates stakes in numerous investment funds into rated securities.

These instruments may encompass an extensive array of underlying assets, such as direct lending portfolios, mortgages, consumer credit, and private equity fund interests. Private capital firms have championed the structures as promising higher returns than traditional securitised products while preserving robust investment-grade credit ratings, rendering them appealing to life insurers in pursuit of long-duration assets to back annuity liabilities.

Nonetheless, regulators have cautioned that the complexity of these vehicles may obscure risk concentrations and foster tighter ties between insurers' investment portfolios than might initially be observable. According to the NAIC papers, the entities are scrutinizing structures such as Apollo's Multi-Asset Prime Securities (AMAPS), which has been utilized by insurer Athene, alongside KKR-sponsored securitisation entities and private equity-linked funds, including Thunderbird and Lightning, which have received investments from Global Atlantic.

Apollo refuted its program, asserting that its multi-asset securities comprise diversified holdings, leverage highly-rated collateral, and have already undergone regulatory appraisal. The firm stated that market participants acquainted with the structures acknowledge both their transparency and advantages. The NAIC working group is also deliberating whether supplementary disclosure prerequisites ought to be instituted for the underlying assets encompassed within these vehicles.

A specific emphasis is the potential "circular ownership," wherein investment structures might indirectly hold interests in themselves or repeatedly invest in overlapping assets, engendering greater exposure concentrations than insurers are cognizant of. Regulators cautioned that, as the market expands, distinct investment vehicles could increasingly invest in each other or hold numerous of the identical underlying assets, potentially magnifying systemic risks during periods of market stress.

Beyond ownership apprehensions, the review is also probing whether certain multi-asset investment vehicles can reliably generate the long-term returns requisite to fulfill insurers' commitments to policyholders. Any progression towards stern disclosure standards or heightened capital requirements could impact demand for these structured products, a domain that has emerged as a progressively crucial distribution avenue for private equity and private credit managers in search of insurance capital.