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The financial watchdog in Bermuda, at the heart of the world’s reinsurance industry, is cracking down on life insurers’ investments in connected parties following problems at 777 Partners and its reinsurer based in the British overseas territory.
The Bermuda Monetary Authority is probing firms’ exposure to affiliated assets, including looking for conflicts of interests, the regulator confirmed to the Financial Times. Insurers will now have to seek its prior approval for new investments of this type and will have to demonstrate that they are an appropriate match for their liabilities.
Events at 777 Re — which was plunged into crisis after taking on significant exposure to assets connected to Josh Wander’s Miami-based investment firm, from football clubs to budget airlines — have raised questions about the regulation of life reinsurers in Bermuda.
The saga also shone a spotlight on investment strategies employed particularly by private equity-backed insurance groups, seeking to match long-term liabilities such as annuities with illiquid investments in private credit sourced by their parent.
The BMA wrote to insurers in December, just weeks after intervening at 777 Re. The watchdog put firms on notice over their exposure to connected parties, and their rationale for investing in them, warning over the risk of “undue influence” on investment decisions, the BMA said.
The watchdog has stepped up scrutiny of firms’ investments through “reporting and onsite examinations”, and by demanding how affiliated parties benefit from the insurer’s investment, it added.
The BMA said in a statement: “The hurdle for insurers to demonstrate that affiliated investments are appropriate for covering policyholder liabilities is an extremely challenging one for insurers to satisfy.”
Bermuda changed its regulations at the end of March to require insurers to seek pre-authorisation of new investments that have credit exposure to an affiliated, related or connected party of the insurer.
Firms had argued that the regulator’s demands for prior approval should not extend to so-called modified coinsurance deals — the structure used by 777 Re — where the assets invested by the reinsurer technically remain on the balance sheet of an insurer that “cedes” this asset. Given insurers’ investments are regulated in their home market, insurers had protested the new rule would cause “regulatory duplication and regulatory incongruity”.
The BMA stuck to its guns, saying in November that its “supervisory experience has shown that affiliated, related or connected party assets can be complex and prone to a potential conflict of interest, creating additional risks and governance challenge”.
Suzanne Williams-Charles, chief executive at Bermuda International Long Term Insurers and Reinsurers, a trade body, said insurers were “committed to operating in a jurisdiction with regulations that promote financial stability and help ensure policyholder protection”.
Life insurers and reinsurers typically back their promises to pensioners with investments in low-risk government and corporate bonds. A combination of lower capital charges for some investments and more flexible rules have led insurers in the US and Bermuda to hold a greater share in securitised loans and other types of private credit than in Europe, for example.
A focus has been asset-backed reinsurance deals. These have hoovered up hundreds of billions of dollars of insurance liabilities, and the assets backing them, moved offshore by US firms — particularly into Bermuda — with a slice of the investments deployed into private credit. One banker said the tougher stance from the Bermuda regulator was likely to weigh on future cross-border deals.
Rising scrutiny and financial pressures on 777 Partners after its bid to purchase English football club Everton escalated dramatically this year and it ultimately dropped its bid for the club, and was sued for fraud by one of its creditors. 777 has denied the allegations.
US insurance group A-Cap and other insurers have now recaptured the assets they ceded to the group. Earlier this month, credit rating agency AM Best withdrew its rating for 777 Re, citing “the absence of any insurance liabilities” at the reinsurer.
777 did not immediately respond to a request for comment.
Additional reporting by Samuel Agini in London