In a report released yesterday, Fitch Ratings said that North American life insurance regulatory reforms to bolster supervision and transparency are supportive of credit.

This came amid growing complexity and illiquidity of certain structured securities, alternative investment manager tie-ups, and the expansion of offshore and third-party reinsurance.

According to Fitch, the National Association of Insurance Commissioners and Bermuda Monetary Authority has enhanced regulatory reforms to better assess and understand reinsurers’ risk.

The NAIC initiatives include the principles-based bond classification project (beginning in 2025), collateralised loan obligation, capital charges (year end 2025), private letter ratings of investment securities (2026) and asset-adequacy testing for ceded reinsurance (year end 2025).

The ratings agency said the BMA’s changes have led to increases in pricing, fees and required capital for reinsurers, creating a higher barrier to entry on the island.

“Recently enhanced supervisory measures include in-depth inspections of key risks and concerns, asset and liquidity stress tests, higher required capital and regulatory approval of long-term block reinsurance transactions,” Fitch said.

Notable updates to the regulatory regime include enhanced modelling, improved governance, validation processes and additional reporting requirements for detailed information around insurers’ investment portfolios.

Reflecting the growing and evolving market, the updates centre around ensuring the BMA’s insurance regulations remain sufficiently transparent and fit for purpose, while maintaining its Solvency II equivalence and NAIC reciprocal jurisdiction status.

Supervisory reviews of capital adequacy for privately rated investments are intensifying as burgeoning investment complexity and offshore reinsurance growth have created a more dynamic operating environment.

Fitch said insurers’ growing ties with alternative investment managers, which may create conflicts of interest, are under greater regulatory scrutiny.

Improvements to investment risk management and governance are credit-positive, as investment and capital results are often supported by effective monitoring of investment risks, including limits, changes in values, derivatives, credit migrations and defaults.

Over recent periods, some alternative investment manager companies have been acquiring insurance companies outright, including Apollo (Athene), KKR (Global Atlantic) and Brookfield (Brookfield Wealth Solutions Ltd), while others have taken minority stakes, including Blackstone (Corebridge Financial), Carlyle (Fortitude Re) and Ares (Aspida).

An increase in acquisitions and partnerships between life insurers and alternative investment managers has been driven by the potential of higher incremental yields, coupled with long duration and illiquid liabilities.

Alternative investment manager-backed insurers typically exhibit a higher asset risk appetite than the broader industry, as they look to leverage the asset-origination capabilities and expertise of their partner to generate incremental yield.

Relative to the broader life insurance industry, alternative investment manager-backed insurers allocate a higher proportion of their portfolios to structured securities and private asset classes while tending to have higher allocations to lower-rated instruments.

Life insurers face relatively higher direct risks related to private credit, given their significant and growing investment exposure, with less liquid, complex private assets such as collateralised loan obligations adding incremental investment and asset risk.

Fitch estimated that exposure to level-three investments, which are investments without a readily available market value — and thus deemed to be less liquid — was 21 per cent for North American life insurers affiliated with alternative investment managers, compared with 5 per cent for non-affiliated North American life insurers as of year end 2023.

Somewhat mitigating these concerns are insurance companies’ diversified investment exposures and asset mix. The life insurers in Fitch’s rated universe tend to partner with large alternative investment managers with expertise and track records of strong performance.

Additionally, Fitch said alternative investment manager-backed insurers’ assets and liabilities are typically well matched from the perspectives of duration and cashflow.