Spurt alert: Bermuda’s life reinsurance reached $539bn in 2021

Alirt, which models and analyses the relative financial performance trends of insurance companies, says Bermuda is by far the largest foreign reinsurance destination for US life insurers and accounted for just over a third of total ceded life and annuity reserves at year-end 2021.

In its report, “US Life Insurers’ Bermuda Reinsurance Exposure”, Alirt calculates that total life & annuity (L&A) reserves ceded to Bermuda companies rose from more than $424 billion in 2020 to nearly $539 billion in 2021.

The ceded life and annuity reserves to Bermuda at year-end 2021 had increased to 33.62 percent of the total, up from 26.19 percent in 2020. The US part decreased to 59.35 percent from 68.15 percent. The next biggest share was held by the Cayman Islands, but with just less than 3 percent of total US ceded life and annuity reserves.

Some reasons for the recent growth in the use of Bermuda reinsurance include:

• the National Association of Insurance Commissioners’ decision to permit Bermuda as a qualified jurisdiction for 2015 and as a reciprocal jurisdiction in 2020;
• the impact of low interest rates on insurers’ existing life insurance and annuity business;
• the use of Bermuda reinsurance by insurers acquired by private investment firms and asset managers;
• the adoption of this strategy by “traditional” insurers owing to its perceived benefits;
• competitive pressures to gain/maintain market share, especially in individual annuities.

Regarding the types of reinsurance transactions, the most common include coinsurance, modified coinsurance, and funds withheld coinsurance.

In both coinsurance and funds withheld coinsurance, a reserve credit is taken by the ceding company. As such, ‘Life Reserve Credit Taken’, found in annual statutory financial statements, includes reserve credits from both coinsurance and coinsurance funds withheld transactions.

The majority of business ceded to Bermuda reinsurers is executed via modified coinsurance and funds withheld coinsurance, given that Bermuda reinsurers are unauthorised by US state regulators which can necessitate the need for substantial collateral, the report says.

The largest Bermuda life reinsurance operations belong to Apollo (which owns Athene Holding), with total ceded reserves (across two companies) that equalled $156 billion at year-end 2021, almost all of which is ceded via modified coinsurance or funds withheld coinsurance.

“The use of Bermuda reinsurance has grown significantly over the last five years and has become a core strategy for many insurers to support their new business writings, particularly with respect to individual annuities,” the report says. This trend is “poised to grow”, it adds, as more companies adopt this strategy.

It continues: “Additionally, many Bermuda reinsurers are sizable entities and many carry one or more financial strength ratings from major US rating agencies (which is usually reflective of a highly-rated parent company). Also, Bermuda’s regulatory regime is not drastically different from the US and the Bermuda Monetary Authority’s capital requirements are equivalent to European regulatory level (Solvency II).”

It adds, however, that the principal cause of financial difficulties for annuity companies is investment portfolio losses and concentrations in higher risk assets, and this is independent of whether investments are housed in US direct writing entities or reinsurers (domestic or foreign).

The 10 largest Bermuda reinsurance partners of US Life insurers comprise 83 percent of total life insurance and annuity reserves ceded to Bermuda reinsurers by US insurers and includes a mix of newer entities as well as those licensed as far back as the 1990s.

The second largest Bermuda reinsurer, after Apollo, is Manulife Reinsurance (Bermuda), which is owned by Manulife, a publicly traded Canadian financial services firm and parent company of John Hancock Life Insurance Company (JHUSA). Alirt notes that, unlike other companies in the top 10, much of Manulife Reinsurance (Bermuda)’s assumed business from JHUSA dates back to the early 2000s and largely reflects separate account annuity business ceded via modified coinsurance (although this also includes a sizable block of individual life insurance reserves).