Offshore reinsurance booms as regulators play catch-up

Update: Since this issue went to press in early April, A-Cap insurers and Utah regulators agreed to mediation to settle their dispute. In a deal announced April 29, Utah and three A-Cap-owned insurance companies, Sentinel Security Life Insurance Co., Haymarket Insurance Co., and Jazz Reinsurance Co. agreed to pause their pending litigation.

To be a big life and annuity player in 2025 practically requires having a hefty reinsurance partner. Having one based in an offshore jurisdiction might be even better.

The result of the flight of life and annuity blocks to reinsurers based in Bermuda and the Cayman Islands has regulators scrambling to play catch-up. It is a trend that shows no sign of letting up.

Offshore reinsurance gives life insurers more options for investing their capital, with access to increased scale and new business volumes. Transferring blocks of life and annuity policies offshore is a sharply 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.

It is a trend that is generating worries about fiscal soundness. 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. that 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.

Big tax advantages

Bermuda does not impose corporate income tax, capital gains tax or dividend tax, making it an attractive jurisdiction for reinsurers.

Likewise, 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 there’s no problem.

But “if the offshore company has far fewer [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.”

Regulators play catch-up

Bermuda represents approximately 80% of offshore reinsurance by reserves and regulators there are trying to tighten their rules. The BMA’s 2025 business plan includes a proposal for “enhanced public disclosure requirements on investments for long-term commercial insurers.” The authority is also considering strengthening its treatment of structured products and loans.

“In our regulatory initiatives, customer protection will remain at the forefront in 2025,” said Craig Swan, CEO of the BMA. Swan could not be reached for comment.

Suzanne Williams-Charles, CEO of Bermuda International Long Term Insurers and Reinsurers, spent 10 years as a deputy director at the BMA. The island is very concerned about global perceptions that it permits freewheeling financial impropriety, she said.

A BMA consultation paper is specifically directed at increasing the level of transparency as it relates to the investment portfolios and their liabilities and “essentially what the companies are actually doing,” Williams-Charles explained.

“The frameworks in Bermuda for transparency are very well established, but I think that there will always be this underlying offshore perception,” she added. “So I think that Bermuda has had to work very hard to consistently remind key stakeholders and policyholders of the frameworks that are in place and how robust they are.”

The Cayman Islands too

Bermuda is not the only offshore home of reinsurance. The number of reinsurance companies in the Cayman Islands has grown year on year, from 58 writing $9.3 billion in 2020 to 94 writing $25.2 billion in 2024 by the end of Q3, Captive Review recently reported.

The Cayman Islands Monetary Authority found itself in the news last month after Marc Rowan, CEO of Apollo Global Management, blasted regulators for being “asleep at the regulatory switch” while “$150 billion of reserves have moved offshore to Cayman Islands with a fraction of the capital of the U.S. or the Bermuda system, putting the system at risk.”

Athene Life & Annuity, a wholly owned subsidiary of Apollo, remains the No. 1 seller of annuities. Athene Life touts itself as “one of Bermuda’s [l]argest annuity reinsurance companies as measured by capital base.”

In his comments made during a quarterly earnings call, Rowan challenged U.S. regulators to get a handle on the Cayman Islands.

“The state-based regulatory system, which we believe in and are being supportive of, has a choice of evolving to address this issue in payments, or risking someone stepping in and usurping its authority,” Rowan said.

Perhaps not coincidentally, Greg Mitchell, chairman of the board of directors of the Cayman International Reinsurance Companies Association, joined a Life Actuarial Task Force call in March to reassure NAIC regulators.

“Under the Credit for Reinsurance Model [Regulation], we have to fully collateralize at no less than the U.S. [statutory] reserve,” he explained. “So regardless of what the reinsurer holds as an assumed reserve, we’re still collateralizing with the full U.S. stat.”

LATF asset-testing project

LATF is a regulatory body of the National Association of Insurance Commissioners. The task force released a proposal in February 2024 to enhance the testing of reserves supporting reinsurance deals.

“The ability of insurers to significantly lower the total asset requirement for long-duration blocks of business that rely heavily on asset returns appears to be one of the drivers of the significant increase in reinsurance transactions,” reads the proposal from David Wolf, acting assistant commissioner for the New Jersey Department of Banking and Insurance, and Kevin Clark, chief accounting and reinsurance specialist with the Iowa Insurance Division.

LATF has collected comment letters for months and hopes to have the guideline in place by the end of 2025.

Larry J. Rybka is chairman and CEO of Valmark Financial Group. His 38 years in the business nearly parallel the rise, mispricing and collapse of long-term care insurance as well as annuities with living benefits and life insurance with long-term guarantees.

At the time, company actuaries argued that reserving for these different product innovations was “redundant,” Rybka noted. “Now, 20 to 25 years later, in retrospect, these reserving assumptions were not conservative enough.”

Rybka objects to the ongoing LATF efforts to create an asset adequacy testing “guideline” for offshore reinsurance agreements, calling it “window dressing.”

But Rybka and other critics say it does not even give the appointed actuary the right to require additional reserves. If the actuary finds reserves lacking, they should “reflect that in their actuarial opinion,” the guideline states.

“Essentially, if the actuary hired by the carrier thinks its boss needs to set more money aside to cover the promises made to policyholders, the actuary needs to put it in a report,” Rybka said in a comment letter to LATF. “It’s not hard to envision said report being filed away with little attention given to its ‘recommendations.’”

Meanwhile, Brian Bayerle, chief life actuary for the American Council of Life Insurers, urged regulators to give appointed actuaries “a degree of flexibility … in their assessment of the adequacy of reserves.” The actuary must align their work with the regulatory framework of the offshore jurisdiction, he noted in a comment letter.

Nightmare scenario

Concerns about offshore reinsurance are not just about imaginary worst-case scenarios. 

Regulators are actually living the worst case 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 nonexistent 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 having 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 a pair of insurers owned by Advantage Capital Partners, known as A-Cap, saw significant impact from its connection to 777. 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.

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

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

Big annuity sales

Fitch Ratings expects the offshore reinsurance trend to continue. Booming annuity sales are a main driving force. Annuity sales increased from $255 billion in 2021 to $313 billion in 2022, $385 billion in 2023 and $432 billion in 2024, according to LIMRA’s Fact Tank.

Within this business environment, however, the rating service has concerns about “unsustainable growth,” or insurers growing much faster than the industry.

“That can be an indicator of insurers potentially sacrificing profitability for top-line growth,” said Jamie Tucker, senior director and life insurance sector head for Fitch Ratings’ North American Insurance Ratings Group. “If someone’s motivated to grow, they could offer the highest credited rate and perhaps easily grow that top line. But over time, that’ll be reflected in the financials.”

Meanwhile, the National Alliance of Life Companies is concerned that its members, more than 50 small and midsize life insurers, could be squeezed out by the push for heavier regulations on offshore reinsurance.

“Smaller and midsize insurers operate with leaner resources compared to larger market players,” wrote Scott Harrison, CEO of NALC, in a letter to LATF. “The guideline introduces significant additional overhead costs needed to perform asset adequacy testing for ceded business.”

The additional cost of regulation would impact other parts of the business and increase the costs passed on to the consumer, Harrison added.

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.