The reinsurer under fire over owner’s football team bid
The reinsurer under fire over owner’s football team bid | Insurance Business America
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The reinsurer under fire over owner’s football team bid
Downgrades, investment scrutiny, creates sticky mess for would-be Toffees investor
Insurance News
By
Jen Frost
On launch, 777 Re was hailed by CEO Will Rinehimer as an “emerging provider of customized and innovative” reinsurance solutions. Now, the private equity (PE) held reinsurer is facing up to a ratings downgrade hammering and advisor criticism amid a stalled bid by parent 777 Partners for Liverpool, UK soccer team Everton Football Club.
Founded in 2015 by co-founders Josh Wander and Steve Pasko, 777 Re’s PE owners’ self-described mission has been to “build a self-sufficient company that is not dependent on banks and third-party investors in order to overcome the inherent compromises they saw in the prevailing model.”
However, its bid for independence via interdependence on its own companies has come back to bite the business, critics claim, amid scrutiny brought on by Miami-based 777 Partners’ £500 million takeover bid of ailing Premier League Football club Everton.
The firm, already the owner of multiple soccer clubs including Genoa CFC, cleared a key hurdle and got the UK’s Financial Conduct Authority (FCA) nod to seal the deal in late December.
777 Partners and Everton have yet to tie the knot. Meanwhile, scrutiny of its insurance assets has amplified.
Ratings agency concerns add fuel to 777 Re fire
The PE firm’s life reinsurer has played its cards relatively close to its proverbial chest since its 2019 debut under founder and CEO Rinehimer, the former president and CFO of Cayman Islands-headquartered Front Street Re. It has since found itself pulled into the spotlight amid question marks over use of insurer funds to bankroll investments. Action by ratings agency AM Best and reports that the business has been taken under the administrative wing of the Bermuda Monetary Authority (BMA) have added to concerns.
Balance sheet strength, “very weak”. Business profile, “very limited”. Enterprise risk management, “weak”. Operating performance, “marginal”.
That was the verdict of AM Best as the ratings agency in February dropped Bermuda headquartered 777 Re’s financial strength rating to a weak C-. The action represented a second material tumble for the life and annuities reinsurer, which had an excellent A- rating less than six months ago.
As per an AM Best credit report seen by IBA, the reinsurance arm of 777 Partners has been dogged by a high leadership and board turnover and has failed to maintain “an appropriate structure” for its risk profile. The ratings agency further noted its “limited track record” in the high-risk multi-year guaranteed annuity (MYGA) and fixed index annuity (FIA) space in which it plays.
777 Re may have reported three out of four years of positive net income but AM Best cautioned that this is unlikely to be set to continue.
Much speculation in the wake of 777 Partners’ Everton bid has centered on how insurance assets may have been used to fund loss-making investments. In its report, AM pointed to 777 Re having “materially significant exposure” to affiliated assets of 777 Partners and a “great deal of uncertainty” around the liquidity of these.
Despite plans to trim this risk down, “there are significant execution risks, which expose the company to further operational risks,” AM Best noted. The ratings agency declined to comment when approached by IBA.
Among such alleged affiliated assets, as previously reported by Semafor: South American soccer streaming platform Fanatiz, a payday lender, a company that leases aircraft to 777 Partners-controlled budget airlines, and 777 Partners itself. The investigative news outlet has reported that half of 777 Re’s $1.5 billion “customer funds” was poured into riskier investments, an allegation that 777 Partners has called a “mischaracterization”.
Regulator zooms in on PE amid trouble at 777 Re
The reinsurer’s rating troubles come as the Bermuda regulator has zeroed in on the role of PE in life and annuities (re)insurance. PE firm activity in Bermudian life insurance has rocketed since the 2008 financial crisis, with PE-backed firms now accounting for $118 billion out of $287 billion total claims paid.
The International Monetary Fund (IMF) has also raised concerns around life insurers’ exposure to illiquid assets as PE firms have this decade increasingly swept in to fill gaps that more traditional carriers have been reluctant to fill.
PE firms are using a range of strategies to enter life insurance, with balance sheet acquisitions having gained traction since 2020. 777 Re’s experience has set some life insurance professionals on edge.
Four strategies PE firms are using to enter life insurance
As per the IMF, PE firms are using four main strategies to enter life insurance:
PE firms often acquire a minor but strategic share in life insurers, usually under 10%, and offer their expertise in managing investments like structured and private credit, as well as real estate and equity, often in the form of strategic partnerships.
Traditional PE business models include buying life insurers through leveraged buyout (LBO) strategies.
PE companies sometimes hold full or majority stakes in life insurers, integrating these operations with their broader strategic interests.
Life insurance companies frequently use offshore reinsurers, owned by PE firms, to reinsure their portfolios and strategically reorganize their business operations.
Where 777 Partners makes its insurance money
And while of PE firm 777 Partners’ insurance assets its reinsurer has drawn recent focus, it is not the only horse in the stable.
(Re)insurance businesses in the Partners 777 family include Merit Life Insurance Holdings and Merit Life Insurance Co, both also overseen by 777 Re parent Brickell Insurance Holdings (BIH).
Image source: 777 Re financial condition report 2022 – Group Structure
Obra Capital this month sued 777 Partners over its alleged failure to repay a $55 million loan for which it used R&Q shares as collateral around the time of the bid collapse. Among allegations, 777 Partners transferred cash-rich insurance companies Sutton Specialty Insurance and Sutton National Insurance to its co-founder in a bid to hinder creditors.
777 Partners was also alleged to have ultimately defaulted on the multi-million-dollar loan, with a public auction of the R&Q shares having failed to recoup $22.4 million for Obra.
What has would-be Everton Football Club buyer 777 Partners been accused of in lawsuits?
777 partners has faced multiple legal actions, Obra alleged in court documents. Among these:
Three aircraft lessors sued 777 for $30 million over alleged missed lease payments for four jets, leading to repossession of the aircraft and alleging 777 ignored financial obligations.
Change Lending sued 777 for $30 million in damages alleging breach of contract after 777 failed to provide required financial information following a $17 million investment in preferred equity. Change exercised a repurchase right due to the breach, which 777 ignored, diverting funds elsewhere according to allegations.
Balanced Management sued 777 to recover an $11.2 million alleged unpaid debt.
777’s landlord 1 Madison Office Fee sued after 777 allegedly failed to provide a required $5 million security deposit according to lease terms.
Creditor Lasse Meilsoe sued 777 to recover more than $2 million allegedly due on two unpaid promissory notes.
American Express sued 777 for breach of contract due to an alleged unpaid balance of $324,002.89 on a corporate card.
The Oxbridge Group sued 777 for breach of contract after placing three candidates with 777, which then allegedly failed to fully pay the agreed fees, ignoring obligations and refusing to pay an outstanding balance of $94,000.
An investor in Phoenicia, a subsidiary of 777, sued alleging a complex scheme by 777 and Phoenicia to move and conceal assets, describing it as a “sprawling fraudulent enterprise.”
777 Re’s away insurance fallout hits home
Meanwhile, insurance fallout from recent 777 Re revelations has not been limited to its holding group.
Following the reinsurer’s downgrades, insurance group A-CAP CEO Kenneth King jumped to reassure interested parties that it would be cutting ties with the reinsurer within two months. A-CAP company Atlantic Coast Life Insurance has itself faced a long-term issuer credit rating downgrade (to bbb), with its and Sentinel Security Life Insurance’s credit ratings under negative review.
Effectively, King said, 777 Re is now being treated by A-CAP as an “unrated reinsurer”. Prior to the former’s rating troubles, A-CAP had lent more than $400 million to 777 Partners and affiliated entities, Semafor has reported citing documents and people familiar to the matter.
Utah-based SILAC Insurance’s AM Best ratings were also placed under review in early February.
A sticky toffee mess for Everton fans
Reinsurance and soccer may be unlikely bedfellows, but the 777 Re impacts have been keenly felt by Everton fans.
The distressed club is £1 billion in debt and owner Farhad Moshiri appears determined to sell his majority stake. For some Toffees fans, though, 777 Partners is not the answer.
When a business with £1 billion of debt (including shareholder loans) – Everton, considers 777 – a business with $3.6bn of debt (source @JosimarFotball ) a suitable purchaser, then @premierleague can only have one answer @pbsportswriter @PhilippeAuclair https://t.co/jGzvrF3kQM
— the esk (@theesk) March 5, 2024
“The Everton balance sheet needs to be completely recapitalized and I just don’t think 777 are in a position where they will be able to do that going forwards,” said Paul ‘The Esk’ Quinn, Everton fan, financial services professional and football business commentator. “We need to find another investor.”
What that investor might look like? Quinn told IBA he hopes another US-based buyer could swoop in.
As for 777 Partners: “They are just the most inappropriate owners for Everton going forwards,” Quinn said.
777 Partners did not respond to a request for comment.
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