A Huge Trend.

A red flag.

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The following piece was written by Mary Williams Walsh, escapee from The New York Times and now managing editor of News Items. At The Times, she covered the intersection of finance, public policy and the aging population. This included pensions; public debt; bankruptcy, especially Chapter 9 municipal bankruptcy; and insurance, including insurance provided by governments.

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On and off over the past year, we’ve expressed concern about a boom in offshore reinsurance. It’s driven by the big private equity firms --- Apollo, KKR, the Carlyle Group and others. Their business models differ somewhat, but they generally work in groups of three: 

—The private-equity firms buy up big blocks of life-and-annuity business, or sometimes they buy whole insurance companies;

—They reinsure the business through their own offshore reinsurers, freeing up capital thanks to favorable local tax laws and reserve requirements;

—Their affiliated asset-management units then invest the money that secures the reinsurers’ obligations, much more aggressively than did the insurers that wrote the business in the first place.

It's a huge trend, shifting life insurance business into the hands of companies that don’t have the usual life-insurance disclosure rules or solvency requirements. The Federal Reserve and International Monetary Fund are among those expressing reservations about it. Their qualms may have seemed abstract and hypothetical, but now a real-world example of what can go wrong is coming into view.

A Bermuda reinsurer has gone deep underwater. That poses a hazard to the U.S.-based life insurers that have ceded business to it --- mostly fixed annuities, billions of dollars’ worth. (Fixed annuities are like old-fashioned, defined-benefit pensions, but people buy them from life insurers instead of earning them at work. They’re designed to provide reliable retirement income, and they’ve grown as the baby boomers have entered retirement.) 

The troubled Bermuda reinsurer, 777 Re Ltd., is on the hook to pay the annuity obligations, but it’s not clear that it has the money to do so. The Bermuda Monetary Authority, which supervises reinsurance there, has put the ailing reinsurer under administrative control and brought in a team of experts to find out where the money went. The annuitants are in the United States, not Bermuda. They’re supposed to be protected by the insurance commissioners of the 50 states, which regulate insurance in the U.S. system. So far, none of the commissioners has made a public statement about what they’ll do if people’s money really has disappeared in the Bermuda Triangle. The retirees are unlikely to know what they face.

That’s something to keep in mind about insurance: Insurers often do reinsurance deals with each other, to increase capacity and spread risk. It’s typically a beneficial practice. But it also means that if there’s a problem at one company, it can spread to others, dealing hideous surprises to annuitants and policyholders. Unlike banking, which backstops deposits through the FDIC, insurance doesn’t have a pre-funded mechanism to make people whole in a failure.

777 Re is a subsidiary of the private investment firm 777 Partners, based in Miami. Word of the reinsurer’s troubles leaked out not because the Bermuda Monetary Authority announced a crackdown, but, oddly, because last year 777 Partners made a bid to buy 94.1 percent of a British soccer club, the Everton Football Club, of Liverpool. In September, 777’s bid was accepted by the club’s current owner, Farhad Moshiri. Sportswriters naturally wanted to find out who the prospective new owner was and enlighten Everton’s fans. They delved in, and soon big loads of dirty laundry were hanging out.

It turned out that one of 777’s co-founders, Josh Wander, had been busted for trafficking in cocaine and marijuana as a student at the University of Florida. He pleaded no contest and was sentenced to 15 years’ probation. That was 20 years ago, but it was just one blot on Wander’s escutcheon. There was also a run-in at the Bellagio casino in Las Vegas, when Wander left without repaying a $54,000 advance. There was a court order in Utah to pay $245,000 of overdue credit card debt. There were other lawsuits, signaling repeated fallings-out with business partners, lenders, former employees and tax authorities.

Everton is a member of the elite Premier League, which is picky about who owns its teams. The Premier League consists of the top 20 soccer teams in England and Wales --- it’s the league with the most television money, the best-paid players, and the most Darwinian competition. Every year it “relegates,” or cuts out, the lowest-ranked three of its 20 clubs. If you’re cut out, you’re sent to play in a league with less money, fewer stars and less opportunities. It’s very hard to break back in.

Everton seemed to be heading toward relegation last year when 777 came along. It had a lot of debt and a big, expensive stadium under construction on the River Mersey. Its owner, Moshiri, seemed unwilling to keep bankrolling it. At first, 777’s money looked like a godsend. 

But the Premier League is tough. Maybe even tougher than the gimlet-eyed insurance regulators of the 50 states. It has something known as the Fit and Proper Persons’ Test, which screens out prospective owners with “criminal convictions for a wide range of offenses, a ban by a sporting or professional body, or breaches of certain key football regulations, such as match-fixing.” 

When Everton’s fans heard about Wander’s 20-year-old no-contest plea on drug charges, they wondered: Did that count as a “criminal conviction”?

The Premier League stayed mum as it moved forward with due diligence. Wander said — incorrectly, as it turned out — that the purchase would be approved by the end of 2023. 

He seemed to have a respectable track record in the business of sports. In 2018, 777 Partners bought a minority stake in La Liga football club in Sevilla, Spain. Three years later, it bought 99.99 percent of Italy’s oldest soccer team, Genoa C.F.C. By 2022, it owned Belgium’s Standard Liege outright, as well as France’s third-division Red Star. It was a majority owner of Brazil’s Vasco da Gama and Germany’s Hertha Berlin. Plus, it had a minority interest in Australia’s Melbourne Victory, and stakes in basketball and other sports-related businesses. 

The firm seemed to know its way around the care and feeding of professional athletes, though maybe not fan culture. Last year Wander gave an interview to the Financial Times in which he stepped on some toes, saying 777 Partners had paid attractive prices to invest in clubs that had “done a horrible job of commercializing the product.” He also said that a wave of “hyper-commercialization” was coming, and described a strategy that included cross-selling products from 777’s other companies. 

“The vision for this football group is that one day we’re not selling hot dogs and beers to our customers; [it’s] that we’re selling insurance or financial services or whatever,” he said. The fans were so passionate that “they want to be monetized.” 

Banners soon went up in stadiums where 777’s clubs played. “Insurance for football fans?” scoffed one in German, at a Hertha Berlin game. “Josh Wander, the only thing we ensure is our disapproval of you!” 

777 Partners also had interests in film, technology, insurance, and aviation. In 2017, it acquired the intellectual property of defunct World Airways Inc., and entered talks with Boeing to buy a fleet of 787 Dreamliner aircraft. World Airways was once the world’s largest independent charter airline, flying troops and equipment in and out of Vietnam from a base in Oakland. It flew the last airlift out of Da Nang in 1975, taking off under fire with the back stairs still down, as desperate civilians tried to climb on board. It ceased operations in 2014, but in 2017 Wander set about reviving it as a low-cost commercial airline, with a hub in Miami and routes to Latin America and Asia. In 2022, Boeing put out a press release saying that 777 Partners had committed to buy up to 134 jets.

Where was the money for these ambitious ventures coming from? To a great extent, from insurance. 

On its website, 777 Partners says that its founders wanted, from the start, to run an independent company, unbeholden to lenders. They say they got their start-up money — “multiple high-value wins” — in the “structured settlements” business. That means they found people who were receiving regular cash payments over time — again, annuities — to settle big disputes. A typical example would be someone injured in a car crash, getting a stream of payments from the other driver’s insurer. When 777 Partners found such people, it would offer to buy their future payment streams for single, upfront sums.

Of course, most everyday people don’t know how to calculate the upfront value of a stream of future payments. They may be in constant pain or otherwise vulnerable, and they’ll jump at the chance to get an upfront payment that is, in economic terms, way too low. Judging by lawsuits that 777 Partners attracted, that’s how the young company achieved its “multiple high-value wins.” 

One client was a young woman badly injured in a car crash who needed surgery and became addicted to painkillers. From there, she graduated to heroin. Her drug habit cost more than her annuity checks, and when 777 Partners came along, doing business as Liberty Settlement Funding, she signed over her future annuity payments, worth about $793,000, for just $180,000. Her parents sued on her behalf, including a written statement in which she claimed that the 777 people seemed “like they cared about me” because they took her to a hotel and discreetly supplied her with the heroin she craved. At one such meeting, she said, they also gave her papers to sign away her $793,000.

That would surely flunk the Premier League’s Fit and Proper Persons’ Test — what kind of cash-for-annuities business plies its prospects with heroin? — but the case didn’t end in a criminal conviction. The parents’ civil lawsuit was thrown out by a judge who said they didn’t have standing to sue. The young woman herself threatened to sue and got back some of her annuity money, but only after signing a confidentiality agreement that barred her from discussing the case. The trail has gone cold. 

At about the time 777 was pursuing structured settlements in Miami, Apollo Global Management was attracting attention with its insurance triad in Bermuda: its large and growing portfolio of purchased annuity contracts; its Bermuda reinsurer, Athene, freeing up capital; and its asset-management affiliate to create securities to invest in. Billions were pouring into Athene, not just from old-school life insurers but also from company pension plans that were converting to group annuities. Apollo’s model was so successful that other investment firms hastened to Bermuda and other offshore havens to duplicate it. 

That’s what 777 Partners did. In 2019, it founded 777 Re Ltd. in Bermuda, along with 777 Asset Management LLC.

The new reinsurer needed a supply of annuity contracts to reinsure. For that, it worked primarily with a New York company, Advantage Capital Holdings, or A-Cap, which owns several life insurers. They include Sentinel Security Life and Atlantic Coast Life, regulated by the commissioners of Utah and South Carolina, respectively. Sentinel and Atlantic have been valuable cash cows for 777 Partners. Not only do they pay 777 Re upfront for reinsurance, but after that, fresh money keeps flowing in from thousands of annuitants across the United States, who pay regular premiums to keep their contracts in force. 

That’s something else to know about insurance: In the life-and-annuity business, the obligations can be in force for years before the insurer has to start making any payments. When the business is young, there tends to be more cash coming in than going out. Long ago, there were scandals about freewheeling life insurers throwing around all that cash instead of properly investing it for the future, when they’d have to pay claims. That led to insurance regulation by the U.S. states, with very strict rules for disclosure, reserve requirements, and investments. 

Even today, the states have risk-based capital rules that effectively force U.S. life insurers to invest almost entirely in safe, conservative bonds. No waning soccer teams! But investing in conservative bonds became a major problem for life insurers after the financial crisis of 2008. Interest rates were so low, for so long, that the U.S.-based insurers couldn’t find bonds to invest in that would yield enough to cover their obligations. That’s why so many life insurers ended up selling so much of their business to private-equity firms — the private-equity firms were set up offshore, where they didn’t have to invest so conservatively. 

They didn’t have to follow the states’ disclosure rules, either. We know that 777 Re was spending its annuitants’ money on soccer teams and Boeing aircraft only because when 777 Partners made its bid for Everton, the Premier League spent so long on due diligence that sportswriters decided to connect the dots themselves. 

One publication that got a lot of scoops was Josimar, based in Norway, which bills itself as “the world’s only media platform devoted solely to investigative football journalism.” Last year it reported that 777’s aviation venture was no longer the Miami-based budget airline that Wander had originally planned. Instead, 777 was running a jet-leasing business. Two of its customers, Flair Airlines in Canada and Bonza in Australia, were complaining that 777 was overcharging them for the leases and lending them money at 18 percent interest — apparently so they’d have the cash to pay the leases.  

Josimar also reported that one of 777’s jets had been grounded for months at an airport in Pittsburgh, where it had gone for a routine recertification of its Rolls Royce engines. When the work was done, 777 couldn’t produce the cash it needed to pay the bill. The bill then ballooned because fees for parking the grounded plane were added on.  

But the scoop with the biggest impact may have been that 777 Re hadn’t filed audited financial statements for two years. That’s a glaring red flag. Audited financial statements are mandatory. It is not known why the Bermuda Monetary Authority didn’t spot the lapse sooner, but once Josimar reported it, the Authority put 777 Re under administrative control, so its assets couldn’t be removed.  

The commotion caught the attention of A.M. Best, a specialized ratings firm that rates insurers. It had given 777 Re a rating of A-minus, which in A.M. Best parlance means “excellent.” But you can’t claim to be excellent if you haven’t been audited. A.M. Best quickly cut 777 Re’s rating from A-minus to B — from “excellent” to “fair” — and put the reinsurer “under review with negative implications.” That meant more downgrades were likely. 

A.M. Best said one reason for the downgrade was 777 Re’s practice of investing in risky securities brought to it by its affiliate, 777 Asset Management LLC. 

It’s worth pointing out that that’s the business model of all the private-equity-led insurance operations now booming offshore: Their asset managers provide investments that are riskier than what U.S.-based insurers would invest in. It’s part of what makes the offshore reinsurance model so profitable. 

That’s not to say we know that Apollo’s Athene, KKR’s Global Atlantic, or any of the other private-equity-owned reinsurers are loading up on dud assets and headed for big downgrades. The point is: We don’t know. We can’t know. The disclosure rules in Bermuda don’t call for reinsurers to file public lists of all of their investments, the way the rules for state-regulated insurers do. Once an insurance contract moves offshore, you can’t find out what’s securing the promise any more. 

As a practical matter, the annuitants exposed to the 777 saga are unlikely even to know their contracts have gone offshore. Annuitants, policyholders and pensioners aren’t consulted on any of these practices. They are just expected to keep on paying their premiums. 

In February, A.M. Best downgraded 777 Re again, this time to C- minus, or “weak.” No insurer will do business with a C-minus company. It’s hard to see why the Premier League would deal with a C-minus company either. In addition to its Fit and Proper Persons’ Test, the League has a rule against buyers who provide “false, misleading or inaccurate information.” For a rating to fall from A-minus to C-minus in less than four months, someone must have had false, or at least stale, information.

A.M. Best also downgraded the A-Cap Group, but not nearly as much. And it said there were “negative implications” for Sentinel Security and Atlantic Coast Life, which had been reinsuring business through 777 Re. The ratings firm was concerned about their “high reinsurance leverage and declining counterparty credit quality.” It said it was waiting to see whether Sentinel Security and Atlantic Coast would have to unwind their reinsurance deals with 777, and put the annuity obligations back onto their own balance sheets. 

If they did, the ratings firm warned, “adequate risk-based capital measures may not be achieved.” Uh-oh. Inadequate capital can lead to an insurer being put into receivership, if it’s bad enough. 

The chairman and CEO of A-Cap, Kenneth King, held a webinar to discuss the implications. He said he thought A.M. Best’s action was unwarranted. The ratings firm had to save face after downgrading 777 Re from “excellent” to “weak” in just four months, he said, so it was punishing the counterparties. He said the A-Cap insurers had plenty of capital, and in any case, he was in the process of raising another $400 million. 

He said he had done hundreds of millions of dollars’ worth of business with 777 in the past, but that was over. He and his insurers were “exiting” the relationship, “out of prudence … and really, to take, candidly, some of the noise off of us.” He said the changes would take several months, but there was no reason to think his companies’ capital would be depleted.  

King said he was close to filing detailed regulatory reports with the insurance regulators of Utah and South Carolina. When they’re available, they may shed more light on the fate of the annuitants. Utah has had a team examining Sentinel Security for about a year, but the findings are unavailable.

A number of sportswriters heard about King’s webinar and listened in. They were more interested in the implications for Everton than for the annuitants. For months, soccer journalists have been thinking of 777 Re as the cash cow providing money for the acquisition of Everton. All those incoming premiums! If the A-Cap insurers cut their ties to 777 Re, the cash cow will go dry. That will be the end of 777’s acquisition. There won’t be anyone to “monetize” the fans. If the club’s new stadium ever opens, the fans will still eat hot dogs and drink beer, but no one will try to sell them insurance — or if they do, it won’t be backed by 777 Re.