US regulators push insurers to cut exposure to Everton bidder 777 Partners

Apr 1, 2024 3:47 pm | News

Regulators in the US states of Utah and South Carolina are moving to force five insurers to cut their exposure to the Miami investment firm 777 Partners, according to an official memo seen by the Financial Times.

Their demands are intended to protect retirees, widows and orphans relying on annuities and other products from the insurers. They mark the latest fallout from a dealmaking spree in which 777 has bought sports teams around the world and come as it is bidding for English Premier League football club Everton. 

The five insurers and reinsurers belong to the A-Cap group, and together held $11.5bn of assets at year end. Of this, $2.9bn was invested in entities related to 777, according to a notice to all state insurance regulators on Thursday.

Annuities such as those offered by A-Cap’s insurers are typically backed by low-risk investments in liquid securities, to provide a safe match for their long-term promises and because policyholders are often able to redeem funds, subject to penalties. 

South Carolina rules limit investments in a single issuer to 3 per cent of assets, and in Utah the cap is 10 per cent. According to figures in the regulatory memo, A-Cap investments in 777-related entities were $1.8bn over the threshold at the end of 2023.

Regulators in those states were working together to issue “supervision orders”, the memo said, under which they can direct an insurer to remedy rule violations. A-Cap can appeal against any such orders and challenge the calculations underpinning them.

A person close to A-Cap said partners had already been found to take on its 777 exposure, which it said the memo “grossly overstated”, and it expected a rapid resolution of the process.

A-Cap owns five insurers: Sentinel Security Life, Haymarket Insurance and Jazz Reinsurance in Utah, as well as Atlantic Coast Life Insurance and Southern Atlantic Re in South Carolina. All five were in violation of limits on single-issuer exposure, the memo said.

The potential for forced sales of investments comes as 777 is under heightened scrutiny and faces multiple lawsuits from creditors.

A-Cap said its businesses adhered to “the highest standards of operational and financial responsibility”, that it worked “closely and cooperatively” with regulators and took “every necessary and appropriate action to comply” when issues were identified. 

“In recent weeks, we have been actively executing a plan to reduce the concentration we have with a particular counterparty — despite the fact that it constitutes a small portion of our total assets under management and far less than has been reported by some. We expect to complete that process imminently, ensuring we remain in compliance with all relevant regulatory guidelines,” it said.

The notice to regulators comes five weeks after A-Cap’s chief executive, Kenneth King, announced plans to raise up to $400mn of new capital following a credit rating downgrade by AM Best. The rating agency also downgraded the Bermudian reinsurer 777 Re because of fears about the quality and diversity of investments which A-Cap and other insurers had “ceded” to 777 Re to manage.

Initially, 777 Partners made its money in esoteric corners of finance such as structured settlements. Its bid to buy Everton, the nine-time English champions, from British-Iranian Farhad Moshiri has pulled it into the spotlight, drawing scrutiny from local politicians, journalists, insurance analysts and regulators.

Everton play against Crystal Palace at Goodison Park
Everton play against Crystal Palace at Goodison Park, Liverpool, in February: funding for a new stadium has stretched the club’s finances © Peter Byrne/PA

The Premier League, which last year strengthened the tests it carries out on club owners and directors, has been assessing 777 since September. A person familiar with the league’s process said 777 must meet “strict conditions” ahead of any approval.

In a letter published on Friday, Everton chief executive Colin Chong wrote that the process had “taken longer than any of us anticipated” but was “approaching the final stages”.

It is unclear how 777 Partners will fund a takeover of Everton if approved, although the firm has provided at least £150mn of loans to the club since September.

In accounts for the year to June 2023 published on Sunday, Everton reported a net loss of £89mn and said its net debt had increased to £330mn from £141mn a year earlier.

Moshiri has been battling to keep funding Everton’s new stadium since the pandemic battered the club’s finances and Russia’s war on Ukraine forced him to cut sponsorship deals with companies associated with former business partner, Uzbek-born Russian oligarch Alisher Usmanov.

Everton’s accounts warned of a “material uncertainty that may cast significant doubt about the group’s ability to continue as a going concern” but said the board was “confident that funding will be secured or refinanced”.

A-Cap entities directly funded some of 777’s sports investments, including providing what appears to be $60mn in short-term working-capital finance to Nutmeg Acquisition, an entity involved in 777’s football deals. Haymarket also lent $91mn to Jarm Capital, a Delaware company then owned by Josh Wander, co-founder of 777, according to a person familiar with the situation.  

Wander declined to comment. 777 Partners said A-Cap was one of a number of lenders to the firm and its portfolio companies, and it remained “confident in its ability to fund both the [Everton] transaction and the Club’s three-year business plan”.

The Utah regulator declined to comment. South Carolina’s regulator did not respond to requests for comment.

Regulators around the world are putting increasing scrutiny on a shift in the investment strategies of life insurers to target more privately traded, illiquid assets, and in reinsurance structures that shift significant risks to offshore firms.

Additional reporting by James Fontanella-Khan and Harriet Clarfelt in New York.

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