The low interest rate environment has wreaked havoc with many investors, particularly those who rely on investment income. Life insurers in particular have seen their income drop and have been seeking higher-yielding, albeit more risky, investments to turn the tide. The pursuit of profit has put these companies on the radar screen of state regulators, who are concerned about credit risk at some of the nation's largest insurers.

Risk is in again
It's no surprise that companies like AIG (NYSE: AIG) and MetLife (NYSE: MET) would want to bump up yields by investing in mortgage-backed securities and other risky investment vehicles. MetLife, for instance, saw its investment yield fall from 4.94% a year ago June to 4.76% at the end of the second quarter. To add spunk to its bottom line, AIG wound up buying back over $7 billion of its former toxic portfolio when the Federal Reserve Bank of New York auctioned off the last of the Maiden Lane investment vehicles late last month.

Life insurers aren't the only ones hungry for once-shunned MBS products. The auction of the last Maiden Lane portfolio, created by the FRBNY in 2008 to remove toxic assets from AIG's books to prevent the company's failure, was a smashing success. The vehicles consisted of once-toxic MBSes and collateralized debt obligations, and the Maiden Lane III auction attracted over a dozen bidders and created a profit for taxpayers of $6.6 billion.

Similarly, a big finish is expected as bankrupt Residential Capital, formerly part of Ally Financial, sells off its loan origination and loan servicing businesses. The dispersion of the company's assets has spurred scuffles among bidders drooling over the now-coveted divisions. Nationstar Mortgage (NYSE: NSM), once was considered the heir apparent to ResCap's goodies, but it has been locked in battle with Berkshire Hathaway (NYSE: BRK-B) for most of the summer over these assets. Others are creeping onto the scene as well, and other bidders such as Ocwen Mortgage and Walter Investment may also have an interest.

One Fool's take
Regulators have reason to fret over the health of large insurers, and the state of New York is currently investigating how these companies use reinsurance subsidiaries to manage risk. In addition, companies like AIG and Genworth Financial (NYSE: GNW) are under scrutiny by the Consumer Financial Protection Bureau for possibly flouting real estate laws and paying bribes to secure business through their mortgage insurance divisions.

If the new rules to increase the companies' capital reserves are deemed necessary, the group of state regulators known as the National Association of Insurance Commissioners could institute them before the end of the year. This would doubtless send up a cry from the insurers, who are not known for their fondness for increasing capital reserves. In the long run, however, the rules should make the industry stronger and safer, good news for consumers and investors alike.

Insurance companies aren't the only ones looking for higher payouts. Income investors of all stripes are looking for the best of the yields -- which is why I invite you to read our special report showcasing The 3 Dow Stocks Dividend Investors Need. Check it out -- gratis -- right here.