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The financial watchdog in Bermuda, at the heart of the world’s reinsurance sector, is cracking down on life insurers’ investments in affiliates after problems at 777 Partners and its reinsurer based in the British Overseas Territory.
The Bermuda Monetary Authority is investigating companies’ exposure to linked assets, including looking for conflicts of interest, the regulator confirmed to the Financial Times. Insurers will now have to request prior approval for these types of new investments and demonstrate that they fit in well with their obligations.
The events at 777 Re – which entered crisis after gaining significant exposure to assets linked to Josh Wander’s Miami-based investment firm, from football clubs to low-cost airlines – have raised questions about the regulation of life reinsurers in Bermuda.
The saga also spotlighted the investment strategies employed in particular by private equity-backed insurance groups, which seek to match long-term liabilities such as annuities with their parent company’s illiquid private credit investments.
The BMA wrote a letter to insurers in December, just weeks after intervention in 777 Re. The watchdog notified companies of their exposure to related parties and their motivations for investing in them, and warned of the risk of “undue influence” on investment decisions, the BMA said.
The watchdog has stepped up scrutiny of companies’ investments through “on-the-spot reporting and investigations,” and by demanding to know how affiliates benefit from the insurer’s investments, he added.
The BMA said in a statement: “The hurdle for insurers to demonstrate that affiliated investments are appropriate to cover policyholder liabilities is extremely challenging for insurers.”
Bermuda changed its regulations at the end of March to require insurers to obtain prior approval for new investments that have credit exposure to an affiliate, related or related party of the insurer.
Companies had argued that the regulator’s pre-approval requirements should not extend to so-called modified coinsurance arrangements – the structure used by 777 Re – where the assets invested by the reinsurer technically remain on the balance sheet of an insurer that this asset ‘relinquishes’. . Since insurers’ investments are regulated in their home markets, insurers had protested that the new rule would cause “regulatory duplication and regulatory incongruence.”
The BMA stood firm, saying in November that its “supervisory experience has shown that the assets of affiliated, related or related parties can be complex and subject to a potential conflict of interest, presenting additional risks and governance challenges”.
Suzanne Williams-Charles, chief executive of 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 retirees with investments in low-risk government and corporate bonds. A combination of lower capital requirements for some investments and more flexible rules have led to insurers in the US and Bermuda having a larger share of securitized loans and other forms of private credit than, for example, in Europe.
The focus was on asset-backed reinsurance contracts. These have sucked up hundreds of billions of dollars in insurance liabilities, and the assets underpinning them have been moved abroad by US companies – mainly to Bermuda – with some of the investment going into private credit. One banker said the Bermuda regulator’s tougher stance was likely to weigh on future cross-border deals.
The increasing scrutiny and financial pressure on 777 Partners following the bid for English football club Everton escalated dramatically this year. Ultimately, the company 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 on 777 Re, citing “the absence of any insurance obligations” at the reinsurer.
777 did not immediately respond to a request for comment.
Additional reporting by Samuel Agini in London