Bermuda's long-term insurance and reinsurance sector is drawing renewed scrutiny following a Wall Street Journal investigation into the use of complex structured securities by US life insurers, the Royal Gazette reported.
More than US$1 trillion of American insurers' holdings are "parked in Bermuda", the Royal Gazette cited the Journal as reporting, as state regulators struggle to keep pace with the rapid evolution of structured debt products.
The report centred on collateralised loan obligations, or CLOs, pools of leveraged corporate loans sold to investors in tranches. The National Association of Insurance Commissioners (NAIC) spent four years developing revised risk-based capital (RBC) factors for CLO investments before voting to adopt them on June 23. The new rules, effective for year-end 2026 RBC filings, are designed to protect insurers against losses on approximately US$314 billion of CLO exposure.
However, the Royal Gazette said the Journal found that insurers had shifted into structured products not covered by the CLO changes. These include securities backed by student loans, car payments, and music royalties. Aaron Sarfatti, a former chief risk officer at insurer Equitable, told the Journal that "people feared a major crackdown in CLOs and so they created other forms of oftentimes similar structured securities to invest in."
The findings carry direct implications for Bermuda, whose long-term insurance and reinsurance sector held approximately US$1.52 trillion in assets at the end of 2024, up 19% from a year earlier, the Royal Gazette reported. More than 80% of that ceded business originates in the US, per the Bermuda International Long-Term Insurers and Reinsurers (BILTIR) association.
The sector's growth has been driven by the transfer of annuity and life insurance blocks from US carriers to Bermuda-based reinsurers. Several of the island's largest life reinsurers are owned by or affiliated with alternative asset managers, including Apollo, KKR, Brookfield, Carlyle, and Sixth Street.
Mortgage-backed and asset-backed securities accounted for 21.1% of the long-term sector's assets at the end of 2024, according to the BMA's latest market report as cited by the Royal Gazette. The authority's stress tests found that most insurers retained capital above regulatory requirements under a severe financial-crisis scenario.
The Bermuda Monetary Authority (BMA) has tightened oversight of the long-term sector in recent years through stronger investment and liquidity reporting, enhanced disclosures, and changes to capital requirements. The Royal Gazette noted that the Journal pointed to Bermuda as evidence of the difficulty facing state regulators, as capital can migrate into newly structured securities before rules on older products take effect.
