Bermuda’s growing role in the offshore life and annuity reinsurance market is being fuelled by strong retirement-product sales and demand from insurers for capital, but the shift is not without risks, according to AM Best.

The ratings agency said offshore life and annuity reinsurance has grown at an average annual rate of 31 per cent over the past decade, with most United States market growth coming through annuity sales.

Bermuda remains by far the leading offshore destination for this type of reinsurance. AM Best previously said the island accounted for 39.9 per cent of reserves ceded by American life and annuity insurers in 2025, while the Cayman Islands accounted for 2.3 per cent, up from 2 per cent a year earlier.

Separate Alirt research put Bermudian-based reinsurers’ share at about $1.1 trillion of the $2.7 trillion in US life and annuity liabilities ceded at the end of 2025 — 40.7 per cent of the total and 85 per cent of liabilities ceded outside the US.

However, the new report said the amount of business ceded offshore has increased insurers’ exposure to risk from their reinsurers.

Edward Kohlberg, a director at AM Best, said the treatment of capital and reserves could be less stringent offshore.

“There is increased recoverability risk in some cases due to a lack of collateralisation in some jurisdictions,” he said.

AM Best issued a broader warning that insurers need to stress-test offshore reinsurers’ financial resilience.

The report does not single out Bermuda in that warning. The island has been the dominant offshore market for US life and annuity business, although AM Best said last week that Cayman gained market share in 2025, helped by new sidecars.

Cayman has been working towards reciprocal status from the National Association of Insurance Commissioners for years and in recent weeks moved closer to that goal. Bermuda already has that status alongside France, Germany, Ireland, Japan, Switzerland and Britain, which means they are subject to different collateral requirements.

AM Best said ceded life and annuity reserves more than doubled between 2018 and 2025 as higher interest rates supported annuity sales. It expects more insurers to use reinsurance to manage growth and capital.

At the end of 2025, US insurers had taken about $1.61 trillion in reserve credits from reinsurance transactions. Of that total, 41 per cent related to funds withheld that belonged to reinsurers, up from about 21 per cent in 2016.

Funds-withheld and modified-coinsurance arrangements can reduce an insurer’s credit exposure to a reinsurer because assets stay with the ceding company.

AM Best said reinsurance leverage among US life and annuity insurers rose to 346 per cent at the end of 2025, from 258 per cent in 2021, as fast-growing annuity writers increasingly used reinsurance to support new sales.

Mr Kohlberg said in a video interview discussing the report: “We’ve seen a strong growth in the annuity market, and as that happens, we’re seeing companies use more reinsurance, mostly on a flow basis.”

He said smaller fraternal and mutual insurers were using flow reinsurance to support expansion and distribution, while larger companies were using affiliated reinsurers, in some cases offshore entities.

The growth has also brought more private-equity capital into the market. Mr Kohlberg said their investment expertise could help insurers to gain exposure to “private credit-type investments” and structured assets offering higher yields, while their ownership could provide “additional capitalisation to support current blocks of business and to support future growth in the annuity market”.

But he cautioned that these strategies brought risks as well. “There are some concerns with some of those investments,” Mr Kohlberg said. “They tend to be less liquid.”

Lou Silvers, senior financial analyst, said the share of bonds in life insurers’ investment portfolios had fallen to 66 per cent from 70 per cent over five years, while private-placement bonds had increased from about 40 per cent to almost 50 per cent of bond portfolios. He also noted a rise in Level 3 assets, which are harder to value because they rely on models or less observable market data.