Proliferation of Insurance Focused Financial Instruments

Up against the same headwinds, alternative asset managers have been migrating into the private credit markets to amplify returns, utilizing several avenues including private debt, private equity and asset-based financing (“ABF”). The private markets have served as an attractive asset allocation alternative with compelling risk-reward profiles and relative stability versus the public markets that are subject to stronger technical pressures and heightened volatility. Through the creation of Insurance Focused Financial Instruments (“IFFI”), alternative asset managers can access the investment capital of insurance companies and insurance companies can invest in higher yielding assets while diversifying into alternative asset classes.

The marriage of higher yielding assets from alternative asset managers with the growing investment needs of insurance companies creates a symbiotic relationship, as evidenced by recent mergers and acquisitions. A number of private equity and private credit funds have purchased, partnered with or launched insurance companies. Apollo’s merger with Athene, KKR’s acquisition of Global Atlantic, Brookfield’s purchase of American Equity Life, Carlyle’s minority stake in Fortitude and HPS Investment Partners’ partnership with The Guardian Life Insurance Company of America (and BlackRock’s subsequent acquisition of HPS Investment Partners) all demonstrate the ongoing alignment. Other private credit or private equity funds have purchased alternative asset managers focused on creating financing solutions targeted towards insurance companies, such as Blue Owl Capital’s acquisition of Kuvare Asset Management.

At the heart of the relationship between insurance companies and alternative asset managers are IFFI. These financial instruments are generally rated, backed by private equity and private credit investments, and are often structured to provide favorable National Associate of Insurance Commissioners (the “NAIC”) risk-based capital treatment. Therefore, IFFI allow insurance companies to invest in assets with the attractive return profile of private markets while preserving favorable risk-based capital treatment.

As an example of an IFFI, a Collateralized Fund Obligation (“CFO”) may issue rated debt and a residual position that is collateralized by LP secondaries. While the risk-based capital treatment for secondaries is onerous for an insurance company, the investment grade debt issued by the CFO is far less taxing, offering insurance companies an opportunity to invest in the desired fund strategy via relatively high-yielding debt securities backed by private equity.

Recent determinations from the NAIC have supported many of the new financial instruments targeted towards insurance companies. In particular, in Statutory Issue Paper 169, “Principles-Based Bond Definition”, the NAIC established principal concepts for determining whether a debt security qualifies for reporting as a bond. Key considerations include cashflow predictability and credit enhancement – features routinely structured into IFFI. Additionally, on November 19, 2024, at the national meeting of the NAIC, the executive committee adopted an Amendment authorizing state insurance regulator discretion over NAIC designations. By formalizing the definition of a bond and the process whereby state insurance regulators can challenge the rating and designation of a financial instrument, insurance companies and issuers of IFFI have gained confidence that the NAIC has accepted the status of IFFI as favorable risk-based capital investments.

Financial instruments have been evolving over recent years to entice the investment capital of insurance companies. Other examples of common IFFI include: Rated Feeder Funds, Rated Private Loans, and NAV Financing Facilities.

While IFFI offer material upside to market participants, investing in these assets does present certain complexities including valuation, cashflow and waterfall modeling. Many IFFI are not modeled in the traditional cashflow, and waterfall engines used for structured products, creating challenges for insurance companies and investors to perform the valuation and scenario analyses required by regulators. Additionally, many alternative investment managers do not have trustees and administrative services designed to focus on the unique reporting and trustee needs of IFFI.

Kroll has partnered with issuers, investors, rating agencies and banks to support the needs of IFFI. Kroll works with issuers and investors to assist in structuring, valuation and modeling of these financial instruments. Kroll’s Agency and Trustee Services Team provides bespoke administrative services specific to IFFI and assists issuers through the entire capital markets life cycle with administrative and trustee services for their unique capital markets transactions. Additionally, Kroll also provides restructuring assistance and secondary placement of collateral and end-of-life fund solutions for SPVs and funds that issue IFFI.

If you are interested in investing in or issuing IFFI, please reach out to Kroll:

Financial Instruments:
Aaron Read
Managing Director
[email protected]
+1 212 833 3440

Administrative and Trustee Services:
Adam Raffa
Managing Director
[email protected]
+1 212 277 0141