Offshore reinsurance: Rising popularity. Rising risk?

Resolution Life recently announced one of the largest Bermuda reinsurance deals to date: a $9.7 billion portfolio ceded by Protective Life Corp.

The transaction includes blocks of in-force structured settlement annuities and secondary guarantee universal life business, Resolution Life said in a March 7 news release. Under the agreement, Protective retains administration of the policies.

While the size of the deal is significant, little else about the deal is noteworthy. It has become an accepted – and executives might say essential – modus operandi for the life insurance industry.

“This strategic transaction with Protective showcases our ability to manage complex life and annuity products at scale,” said Warren Balakrishnan, CEO of Resolution Life. “This transaction is a great example of our reinsurance offering to the U.S. life and annuity market.”

Offshore reinsurance gives life insurers more options to invest their capital, with access to increased scale and new business volumes. Transferring blocks of life and annuity policies offshore is a strikingly upward trend that Fitch Ratings fully expects to continue.

U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 billion to $1.3 trillion in 2023, Fitch noted in a recent report. During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, exceeding $450 billion.

Bermuda represents approximately 80% of offshore reinsurance by reserves.

But not everyone is on board with the trend. Critics note that the Bermuda Monetary Authority uses different accounting methods to calculate reserves and U.S. policyholders could be vulnerable.

“To me, it's troubling that the regulators in the U.S. who are supposed to protect U.S.-domiciled policyholders would defer to Bermuda or anywhere else, just because of a reinsurance contract with an offshore affiliate,” said Tom Gober, a certified fraud examiner with expertise in life insurance.

Reinsurance paradise

The offshore reinsurance trend has Moody's concerned about counterparty risk and regulatory transparency. In a report last month, the ratings agency cited potential negative credit implications for the life insurance sector.

“The overall movement of business offshore is a net credit negative for the life insurance sector because of increased counterparty risk, less transparent financial regulation compared with businesses that reside in the US, as well as a lack of transparency around financial assumptions and disclosure on the reinsured business,” Moody’s stated.

Determining why reinsurance companies prefer Bermuda is not difficult. For starters, Bermuda does not impose corporate income tax, capital gains tax, or dividend tax, making it an attractive jurisdiction.

Secondly, Bermuda allows the creation of alternative risk transfer mechanisms, such as catastrophe bonds and Insurance-Linked Securities, which are increasingly popular in the reinsurance industry.

Bermuda’s regulatory framework has been deemed equivalent to the EU’s Solvency II rules, allowing companies to do business in Europe without additional regulatory burdens.

Then there are the financial reporting requirements. In Bermuda, insurance companies file under GAAP (Generally Accepted Accounting Principles) rules, Gober explained. Filing under GAAP, as opposed to statutory accounting principles required in the United States, means insurers can defer billions in liabilities, he added.

For example, let’s say an insurer pays $3 billion in agent commissions. Under GAAP reporting, the company is allowed to defer recognition of those expenses, Gober said, and spread it out over the life of the policies.

“The reason that really matters is because that money is gone when you pay those agents,” Gober said. “When you pay a commission to an agent, you can't just suddenly say, ‘Oh, we want that commission back.’”

As long as nothing unusual happens and the reinsurer isn’t needed as a financial backstop, then no problem.

But “if the offshore company has far less [reserves] than what they need for that block of business,” Gober noted, “then under a period of economic stress, the U.S. carrier might demand its money back, and the funds won't be there.”

The mess that is 777 Partners

The worst-case scenario is playing out with 777 Re, the Bermuda-based reinsurance arm of 777 Partners. The Miami-based 777 Partners faces multiple lawsuits alleging financial improprieties. Notably, Leadenhall Capital accuses the investment firm of fraudulently borrowing hundreds of millions of dollars against non-existent or doubly pledged assets.

The U.S. Department of Justice issued criminal subpoenas to employees of 777 Partners as part of a money laundering investigation. Additionally, the firm has been accused of financial misconduct, including fraud and unpaid debts. Subsidiary 777 Re is based in Bermuda and had reinsurance agreements with several U.S. life insurance companies.

The conduct of the parent company attracted regulators and analysts to 777 Re. Some life insurers recaptured their blocks reinsured by 777 Re.

But Advantage Capital Partners, known as A-Cap, still saw a business interruption after Utah and South Carolina regulators banned Sentinel Security Life Insurance Co. and Atlantic Coast Life Insurance Co., respectively, from writing new business after Dec. 31, 2024.

Both state insurance departments worked together throughout 2024 piecing together the assets and financial strength of the insurers. That led to disputes over valuations that were argued in administrative law courts in both states.

Both Sentinel Security and Atlantic Coard are writing business, but the case is far from settled.

While declining to address the 777 Re situation, Suzanne Williams-Charles, CEO of the Bermuda International Long Term Insurers and Reinsurers association, said the regulatory regime in Bermuda is meeting the present challenges.

“When I look at the enhancements that the [Bermuda Monetary Authority] has recently introduced, included in those enhancements are measures that would likely help eliminate the situation recurring,” she explained. “The BMA now requires all transactions with affiliates to be pre-approved, so they have increased visibility before things are executed.

“There are requirements for firms to be able to demonstrate that investment decisions are being made kind of in the best interest of policyholders, and there's appropriate asset-liability matching.”

Coming up: Next Tuesday, in part two, we will explore efforts by the BMA and the National Association of Insurance Commissioners to step up regulations of offshore reinsurance. And Bermuda is not the only offshore reinsurance destination.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.