Revolution in Bermuda.

A brave new world offshore.

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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 government. This piece expands upon her previous piece on the subject of reinsurance finance. It’s an eye-opener.

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We’re still watching the ripples spreading out from 777 Re, the Bermuda reinsurer whose parent company tried to buy Liverpool’s Everton soccer club last fall. It’s been a fiasco. British soccer regulators discovered that the parent, 777 Partners, couldn’t provide audited financial statements, an unheard-of breach in the insurance business. 777 Re was belatedly downgraded to C-minus by A.M. Best. That’s close to a death sentence. The Bermuda Monetary Authority put it under administrative control. No one can remove a penny without permission. 

But is there even a penny left to remove? Lawsuits are piling up. The 777 companies are accused, in various jurisdictions, of missing their payrolls, failing to pay rent, and putting “cash-rich subsidiaries” into the hands of a founder, to hide them from creditors. Among the creditors: three aircraft lessors who say 777 Partners owes them $30 million for four jets; a landlord chasing a $5 million security deposit; a community-development lender that says 777 Partners used its $17 million capital investment to pay bonuses; the Boca Beach Club, where a $1.2 million “investment retreat” wasn’t paid for; and American Express, which wants to collect an outstanding credit-card balance of $324,002.89. 

Just last week the Russian financier Oleg Boyko asked a court in Miami for an emergency injunction to keep the 777 companies from selling assets, including real estate, until he can collect on an 8.5 million euro loan that 777 Partners hasn’t repaid. The loan financed 777 Partners’ foray into soccer in 2020, when it bought a stake in the Sevilla club. Boyko told the court that 777 and its founder, Josh Wander, were “fraudulently transferring assets” around a complex corporate structure “to avoid paying creditors.” Wander called Boyko’s lawsuit a publicity stunt, designed “to compel undue pressure in ongoing negotiations over a credit facility.” 

Really? Someone is still thinking of lending this company money?

These and other legal storms were raging when Kenneth King came forward. He’s the CEO of a U.S.-based insurance group known as A-Cap, which has exposure to 777 Re. He confirmed in a webinar that he’d done a lot of business with the ill-managed reinsurer, but said his own insurance companies were safe. He knew how to stop any blowback from Bermuda. He had been planning to raise fresh capital even before 777 Re was put on death row — $400 million. 

“We’re very confident that investors want to participate and invest in the C-Cap platform,” he said. 

He said his insurers would stop doing business with 777 Re, but had not yet terminated the contracts. Insurers constantly receive premiums from their customers, and A-Cap’s insurers then credit the premiums to 777 Re, as payment for its reinsurance. 

“To shut off the flow of liquidity to our reinsurer would have paralyzed them and essentially created more risk to A-Cap,” King said. So the annuitants’ dollars are still going to 777 Re, and one can only hope another creditor doesn’t find a way to get them. King said it would probably take about six months to wind down the reinsurance safely.

He also mentioned that he was about to submit his insurers’ year-end regulatory filings to Utah and South Carolina. 

That sounded like an invitation to get the filings and see the extent of A-Cap’s exposure. Could King really shield his insurers from the fallout from 777 Re? Would $400 million in new capital be enough? What were the annuitants’ premium dollars being spent on? We also checked the Insurance Holding Company Act, to see what regulators are supposed to do when an offshore reinsurer blows up in its U.S. counterparties’ faces. The relevant part was short and broadly written: A commissioner can seize an insurer “whenever it appears to the commissioner” that insolvency is looming, or that the insurer poses a hazard to policyholders, creditors, shareholders or the public. 

Presumably, if it doesn’t appear to the commissioner that there’s trouble on the horizon, then it’s business as usual. We asked Utah and South Carolina about A-Cap and 777 Re. They didn’t answer. Neither did the Bermuda Monetary Authority.

The A-Cap insurers aren’t giants that could set off a global cascade if they failed, the way A.I.G. did in 2008. What makes them compelling is the context. I doubt many of the people who bought annuities from Kenneth King’s companies are aware of it, but Bermuda is hosting a revolution in the life-and-annuity business, driven mainly by America’s big private-equity firms. Business insurance deals have long been done in Bermuda, but this is something different. The private-equity firms buy up blocks of existing insurance contracts, then reinsure them through their own Bermuda-based reinsurance units. Their asset-management units get the job of investing the reserves. 

It’s a brave new world offshore, beyond the reach of the I.R.S. or the National Association of Insurance Commissioners. You get nice tax breaks. You don’t have to meet the N.A.I.C.’s reserve requirements. You aren’t expected to tie up your money in tedious, low-yielding bonds. Apollo Global Management kicked off the trend more than ten years ago and made such a killing that now seemingly everybody wants in. Lots of company pension plans are turning up in Bermuda, too. The retirees’ former employers pay life insurers to take over their pension obligations; the insurers then have them reinsured in Bermuda. 

So here we are. Countless Americans now depend on the skill and integrity of the Bermuda Monetary Authority — and they don’t even know it. No one asks people if they’d like to have their retirement nest eggs stashed offshore. It just happens. Reinsurance is a well-established business and not inherently risky, but in the current boom it’s exposing unprecedented numbers of ordinary Americans to leverage they know nothing about. 

The people shopping for annuities these days tend to be middle-aged and older Americans who are willing to pay up front to get a reliable source of income in retirement. They don’t want to outlive their assets. They don’t want to be burdens on their families. They are trying to do the right thing, and they think the state insurance regulators have their back. The 777 Re drama shows otherwise.  

Kenneth King’s biggest life insurer is Sentinel Security Life; we focused mainly on that one, for simplicity. Sentinel is regulated by Utah, even though its biggest markets are California and Florida. An affiliate, Haymarket Insurance, is also regulated by Utah. A third insurer, Atlantic Coast Life, is regulated by South Carolina. A-Cap also has special-purpose vehicles called “captives,” which life insurers use to “reinsure” their own obligations — a dubious practice, since the obligations never leave the holding company. But the states allow it, and captives are covered by strict state confidentiality laws. If you want to follow the money and there’s a captive, you can’t.

We also looked at the filings of an unrelated insurer, Silac, which is regulated by the State of Indiana and has reinsured a lot of business with 777 Re. 

Silac is owned by Steve Hilbert, the onetime CEO of life-insurance giant Conseco, who was forced out just before it went bankrupt in 2002. Hilbert has remained a prominent business figure in Indiana, working on, among other things, a venture called New Sunshine, which sought to make Indianapolis the “tanning bed capital of the world.” He and his wife touted New Sunshine on “Celebrity Apprentice,” and even had a product deal with Melania Trump at one point. But that fell through, and in 2015 Hilbert went back to the insurance business. He has exposure to 777 Re. 

Or at least he did. 

Silac’s regulatory filings have a footnote titled “Nonrecognized Subsequent Events.” It says that on February 22, 2024, Silac “recaptured” $1.4 billion worth of annuity business from 777 Re. You can see why Hilbert wanted to unwind the deals; 777 Re had just been downgraded to C-minus. But the footnote doesn’t explain how Hilbert got all that money out, since by then 777 Re’s money was under Bermuda’s control, and other creditors were circling nearby, trying to get their money too. The filing does say Silac’s recapture was back-dated to January 1. 

That’s the problem with the insurance filings. They’re extremely detailed, but the more you look at the details, the more unanswered questions you have. The N.A.I.C. prescribes the format, using its own accounting standards. Bermuda uses different accounting standards that don’t match. You can see what appears to be Sentinel’s book of business in Utah, but you’ll miss the big picture because you can’t see what’s happening in Bermuda. 

The level of detail is overwhelming. Insurers routinely report every single investment they hold. Sentinel Security isn’t a giant, but its investment list goes on for 485 pages. The investments include loans to various 777 Partners companies — including one with an interest rate of 18 percent. 

Add them all up and Sentinel Security looks like a $1.2 billion company. 

Insurance regulators care about balance sheets. That’s what tells them whether an insurer has enough money to make good on all its obligations. A life insurer’s balance sheet really has to balance. This is not, say, the Chicago police pension fund, where year after year there’s about 25 cents of investments for every dollar of pensions owed, and everybody thinks that’s okay. A life insurer is expected to have total assets worth a little more than its total obligations — around $1.10 on the dollar. 

The extra ten cents or so is known as the insurer’s surplus. Every insurer has to have a surplus. There are always going to be shocks, and an insurer’s surplus is its shock absorber. If a state insurance commissioner sees an insurer burning through its surplus, he’ll ask how the insurer plans to build it back up. If the surplus dwindles away to nothing, the insurer gets closed, or maybe merged into a healthier company.  

Sentinel’s filings say it has a surplus of $130 million. For a $1.2 billion company, that’s just about what you’d expect. 

But then there’s all that reinsurance. 

Insurers get reinsurance to keep their balance sheets stable, among other things. When they write new business they have to book all of the new obligations, but only part of the corresponding premiums. If they kept all the new business on their books, the obligations would soon overpower the assets and their surplus would melt away. So they pay reinsurers to take over some of the obligations. 

If a reinsurer then fails, the obligations go back to the original insurer. But it can be very, very hard for that insurer to take them back without wiping out its surplus. 

That seems to be the problem at Sentinel. Its surplus is $130 million, and it has to bring back a lot more reinsurance than that. Kenneth King said he was going to raise $400 million, but even if he does, Sentinel may still not have the capacity.   

At the end of last year, Sentinel had reinsured $5 billion worth of business with its Utah affiliates – $2 billion with Haymarket and $3 billion with Jazz Re. Because Jazz Re is a captive, and secret, it’s not clear what it did next. It may have re-reinsured some or all of it again, with 777 Re. (Reinsuring business more than once is commonplace. It’s called retrocession.) 

Haymarket’s business isn’t confidential. In addition to assuming $2 billion of Sentinel’s obligations, it retroceded $1 billion to 777 Re. And now 777 Re is on death row in Bermuda.

Sentinel can’t afford to take back $1 billion of obligations. Its surplus is only $130 million. Even if Kenneth King raises $400 million in the coming months and devotes the whole thing to Sentinel, Sentinel still won’t have enough capacity. We can hope the Bermuda Monetary Authority has the power to claw back assets from the other 777 Partners companies, but the U.S. disclosures don’t show anything like that. All they show is the business in Utah, which would be swamped with another $1 billion of obligations. 

Sentinel’s annuitants don’t know this. They’re faithfully paying their premiums to keep their contracts in force, and the money is going to 777 Re. That seems unfair. If Sentinel can’t unwind its reinsurance they may be throwing their money down a rabbit hole. 

A state insurance commissioner’s job is to protect policyholders. But if Utah’s commissioner, Jonathan Pike, warns the annuitants that Sentinel is teetering, they could stop sending their premiums in — but they might also start pulling their money out. They wouldn’t be able to get everything, since Sentinel isn’t a bank, but it appears they could get enough to knock it flat. Sentinel’s filings estimate how much its different customer groups can pull back. For the annuitants, it’s $490 million. There goes the surplus. 

No one wants to trigger a crisis by trying to protect people from a crisis. It must be tempting for the regulators to wait and hope Kenneth King can fix everything. They know insurance shutdowns are awful. There’s no F.D.I.C., just a state-based network of unfunded “guaranty associations” that go out and raise money for a rescue by assessing healthy insurers. It’s a slow and contentious process. If Utah were to close Sentinel, the healthy insurers would argue they didn’t get into bed with 777 Re, so they shouldn’t have to pay because Sentinel did. They’ll fight to keep their assessments low. The dickering can go on for years. Meanwhile, the annuitants will be reeling. And everybody would be blaming Utah. 

Yes, it’s tempting to wait and hope King can fix things. But insurance isn’t supposed to be about hoping. It’s about managing risk and preparing for contingencies. Now that we see what can happen with Bermuda reinsurance, shouldn’t we be preparing for the next one?