When Insurers Fail.

Chapter 4 of the 777 saga.

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The troubles are deepening fast for the unhappy insurance family of 777 Re, Sentinel Security Life, Atlantic Coast Life, A-Cap, and all their corporate kith and kin. The outlook for their unwitting policyholders is dim.

The companies and their principals have been named in some 20 lawsuits, in multiple jurisdictions, by creditors chasing hundreds of millions of dollars in unpaid debt. The parent of 777 Re has hired a turnaround and crisis-management firm, suggesting a bankruptcy filing is coming soon. Officials of the turnaround firm, B Riley Advisory Services, have been placed in governance roles at 777 Partners, with one named its interim chief operating officer. 

U.S. bankruptcy law seems tailor-made for battles like this one, because it forces disparate creditors to work collectively toward a fair resolution of their claims. A federal bankruptcy judge and an arm of the U.S. Justice Department keep watch, to reduce the temptation to cheat. The creditors often get together beforehand to discuss possible settlements, which can hold down the cost of a case. 

But it’s not clear that there’s anyone in there fighting for the thousands of insurance policyholders—ordinary people trying to prepare for retirement and old age—who are being swept into the maelstrom. Insurance in this country is regulated by the states, and they eschew bankruptcy, preferring to use their own state-based tools for rescuing policyholders and curing insolvencies. But those tools look small and slow compared to the coming international clash of titans. 

We’ve already described this disturbing situation here a few times: 

— First, we wrote that a Bermuda reinsurer, 777 Re, had gone underwater and didn’t have the money it needed to pay thousands of American policyholders; we pointed out that 777 Re’s problems came to light only because its corporate parent, 777 Partners, had tried to use the reinsurer’s money to buy Everton, a Premier League soccer team, and the deal got bogged down in due diligence. Why, we wondered, had British soccer authorities spotted 777 Re’s problems before the U.S. or Bermuda insurance regulators did? 

— Next, we wrote that 777 Re had been frozen by Bermuda regulators, and explained that when a reinsurer is in this much trouble, its problems can spread to the insurers. We introduced Kenneth King, the chairman of the A-Cap family of U.S. life insurers, which have exposure to 777 Re. We described King’s webinar for insurance brokers, in which he explained his plan for shielding his insurers from 777 Re’s meltdown and encouraged the brokers to keep selling his companies’ annuities. We explained why King’s plan was going to be hard to carry out.

— Then, The Washington Post was sufficiently alarmed by what it had read here that it asked for a piece explaining how millions of Americans’ retirement money has ended up in Bermuda, which has wholly different solvency and disclosure standards from those in the United States. The last few years have brought an enormous boom in the offshore reinsurance of life policies and annuities, exposing people to risks they know nothing about. 

Since then, 777-related blowups have continued around the world. In Australia, 777 Partners’ budget airline, Bonza, was abruptly grounded when 777 couldn’t make its jet-leasing payments, stranding travelers. Bonza’s cheery purple-and-white jets reportedly were sent to Europe, where LOT Polish Airlines will fly them. 

In Belgium, where the 777-owned soccer team Standard Liège has for months failed to make its payroll on time, a court approved the seizure of all of 777 Partners’ assets, including its shares in the stadium where the team plays. “NO, WE ARE NOT ACCOMPLICES OF 777!” fumed a Standard Liège board member on Facebook. 

In New Jersey, two A-Cap insurers, Sentinel Security Life and Atlantic Coast Life, took the highly unusual step of suing the ratings firm A.M. Best, asking the court to bar it from downgrading them to B- from B++ as planned. The complaint has a whiff of desperation about it; Kenneth King has been unable to complete his safety plan yet, and A.M. Best is apparently unwilling to wait any more. If the downgrade to B- goes forward, few brokers will want to sell the King insurers’ annuities, because of the liability they would incur.

In Utah and South Carolina, state insurance regulators have told King that his life insurers are noncompliant with their investment rules. He must either sell some investments or have them removed from his insurers’ balance sheets—a Catch-22, because the insurers need big, strong balance sheets to unwind their reinsurance deals with 777 Re, as he said he would do in his webinar.

In London, a British investment firm, Leadenhall Capital, became the latest 777 Partners creditor to file suit, saying 777 Partners owed it more than $600 million. But Leadenhall’s complaint has a new twist: It doesn’t just assert that 777 Partners isn’t paying its bills; Leadenhall says that $350 million worth of collateral pledged to it by 777’s co-founder, Josh Wander, consisted of assets that “either did not exist, were not actually owned by Wander’s entities, or had already been pledged to another lender.” 

Pledging collateral that doesn’t exist is fraud. 

“The borrowers were required to own the assets pledged as collateral ‘free and clear’ of any other security interests,” Leadenhall said in its complaint, filed this month in U.S. District Court in Manhattan. “If the borrowers did not actually own the assets pledged as collateral, or if the borrowers had already pledged those assets to another lender, the entire facility would effectively become an illegal and unsecured personal piggy bank…” 

Which is exactly what happened, according to Leadenhall. Its lawyers spent hours on recorded calls with Wander. The firm says at first he pretended that the problems were just “an embarrassing screwup” caused by 777 Partners’ antiquated computer system. But eventually, Leadenhall says, Wander divulged enough information to show that 777 Partners and its affiliates were running “a giant shell game at best and an outright ponzi scheme at worst.” 

Leadenhall filed its suit under the Racketeering Influenced and Corrupt Organizations Act, or RICO. A spokesperson for 777 Partners and Wander did not respond to a request for comments.

The complaint says further that Josh Wander took issue with the notion that Kenneth King was an arms-length businessman trying to unwind reinsurance contracts with 777 Re. Rather, the firm says, King was “the Wizard of Oz behind the 777 Partners’ curtain.” 

“Nothing happens at 777 Partners … without A-Cap’s approval,” the complaint asserts. “A-Cap is the financial engine behind the scenes which provides last-minute loans and investments in ‘Whac-A-Mole’ fashion to 777 Partners, in order to make the enterprise appear solvent to outside lenders and investors.”  

A spokesperson for A-Cap called those allegations “sensational and unfounded, representing yet another desperate attempt by Leadenhall to elevate its collateral seniority and seek payment from A-Cap while undermining A-Cap policyholders. A-Cap, similar to Leadenhall Capital, serves as a lender to 777—there are no ownership ties. The key distinction lies in the fact that A-Cap holds senior rights to collateral associated with 777.”

It’s hard to see how King can be carrying out his stated plan of disentangling his insurers from the 777 companies if, as Leadenhall claims, he’s the Wizard of Oz running the 777 companies. 

But even if he’s not the Wizard of Oz, it’s still hard to see how he can get his money out of 777 when its jets are being repossessed, its soccer assets are being seized, its creditors are filing lawsuits right and left, and the Bermuda Monetary Authority has 777 Re locked down.

And where does that leave his policyholders and annuitants? King swears he has their backs, but he also has regulatory problems. The policyholders appear not to know about the risk that they’re in. A spokesman for the Utah Insurance Department said it’s the brokers’ job to keep the annuitants in the loop. But insurance brokers stay up to date by tracking ratings, and A.M. Best’s downgrades of Sentinel Security Life and Atlantic Coast Life haven’t been published yet. That lawsuit.

Most of the purchasers are older Americans who bought annuities as a secure source of income in old age. They’re presumably still sending in their premiums every month to keep their contracts in force. They don’t want surprises, but it looks like they may be about to get a really bad one. 

If 777 Partners ends up in bankruptcy, A-Cap would have to go too, if Leadenhall is correct that Kenneth King controls the whole thing. Insurance companies seldom go bankrupt, but if one fails, its state insurance regulators typically put it into receivership. A receivership can easily run for months or years, as the receiver and other experts try to pull together as much money as they can for the policyholders. If the money has moved offshore — say, to Bermuda — it’s an uphill struggle to get it back. If the annuitants of Sentinel Security and Atlantic Coast knew what was in the cards, they could at least consider canceling their annuities. They’d have to pay a surrender charge, but at least then they’d be out of harm’s way. 

But they don’t know. It appears that no one has told them. 

By sheer coincidence, this month there was a prominent, sobering reminder of what it can be like to go through a life-insurance receivership. The Wall Street Journal had an update on a life-insurance failure that ended up in receivership in North Carolina. That case involved an insurance financier named Greg Lindberg, who acquired a fleet of insurance companies, then used their assets to make loans to his ever-expanding empire of acquisitions. He used policyholders’ money to buy companies, a yacht, airplanes, mansions in several states and, in the strangest detail of all, surrogate mothers for the children he wanted to have after his wife left him. 

When regulators told Lindberg he had exceeded allowable limits on related-party lending, he tried to placate them by making big campaign contributions. (Insurance commissioners are elected in North Carolina.) Eventually he made a payment to a new insurance commissioner who was working with the F.B.I. and wearing a wire. 

Boom! Lindberg’s insurers were seized and put into receivership. Money stopped flowing to the annuitants. That was in 2019. The payments haven’t resumed since then. In 2020, Lindberg was convicted and sentenced to seven years in prison. He appealed, and after he’d served 21 months, an appellate court threw out his conviction, saying the trial judge had made an error while instructing the jury. The trial was done over. Just this month, Lindberg was convicted for the second time. 

While awaiting his second trial, Lindberg remained free on bail, enjoying his yacht and his mansion in Florida. He argued that he didn’t bribe the insurance commissioner; rather, he said, the insurance commissioner entrapped him. He vows he’ll appeal his second conviction. “Mr. Lindberg has done nothing wrong, and he has said on the record that he will win this battle or die trying,” a spokeswoman said. 

While he savors his freedom, his wealth, and due process, his annuitants are tightening their belts and waiting to be paid. As The Wall Street Journal reported, some have sold their houses, downsized, cancelled travel plans, and forgone meals out. Some have died while waiting for their money. 

The insurance industry has a network of state “guaranty associations” that are supposed to raise money for the policyholders when an insurance company fails. As we’ve noted before, they are not funded in advance, and they have to raise money by assessing each of the failed insurer’s successful rivals, on the basis of market share. Profitable insurers aren’t exactly dying to pay the claims of their insolvent competitors, so they often negotiate to keep their assessments low. It can take years for the policyholders to be paid. Few are ever made whole. 

In Lindberg’s case, the assessment process has not even begun. The North Carolina insurance department froze Lindberg’s companies back in 2019, but before the guaranty associations could get rolling, the insurers had to be liquidated. Lindberg has been fighting liquidation ever since. There’s no reason to think he’ll stop fighting now. 

The A-Cap annuitants really ought to know they could be facing something like this, too, so they can try to protect themselves while there’s time. They don’t have a chance if they don’t have the facts. And annuitants in general ought to know just how much U.S. annuity business is being reinsured offshore these days, where the regulations are different. Offshore reinsurers tend to hold less reserves and to invest more aggressively. Offshore secrecy laws are a poor fit for the retail crowd. And the state guaranty associations may need a retooling. America is now going through the “Peak 65 Zone,” when some 12,000 people turn 65 every day, and often turn to life insurers to set up retirement income. In an age when the F.D.I.C. can rescue bank depositors in a matter of days, it’s shameful to have elderly insurance customers waiting five-plus years, or dying while the process inches along.   

The National Association of Insurance Commissioners has grown concerned that annuitants are being exposed to too much hidden risk offshore. It’s working on ways to test and improve the reserve adequacy of offshore reinsurers. That’s an encouraging start, but the N.A.I.C. by its nature moves slowly. When the new tests are ready, it will have to persuade 56 state and territorial insurance commissioners to adopt them, which could take years. People shopping for annuities now can’t wait. 

Another initiative that might help: At the end of April, Senator Elizabeth Warren announced that she was reviving a previous investigation into the cash bonuses, luxury travel and other perks that insurers offer agents and brokers as sales incentives. She’s concerned that sellers are steering their clients to the insurers that offer them the best perks — not the ones that could best serve their clients’ needs. While she’s at it, she might check out the sales incentives for selling annuities that are going to go offshore. Not all of them do. 

In her announcement Warren didn’t mention 777 Re or Bermuda, but she did say that she had found one insurer, Sentinel Security, that was offering one-week jaunts in Australia to agents who hit their sales goals. She didn’t say which airline had been selected to ferry the top sellers around. I hope it wasn’t Bonza. 777 Partners left it bankrupt.