Rating agency claims ‘lifeblood’ at stake in 777-linked downgrade dispute

AM Best, the specialist rating agency for the insurance sector, has said its credibility risks being “irreparably damaged” by a legal bid to prevent it downgrading US insurers exposed to Everton football club bidder 777 Partners.

The agency is arguing in a New Jersey court that it has a First Amendment right to publish its opinion on a company’s financial strength, after two US insurers accused it of using “flawed methods, improper assumptions, and demonstrably false data” to downgrade them.

“The lifeblood of AM Best’s business is its credibility, and that credibility is irreparably damaged when it is prevented from publishing its opinions about an insurer’s creditworthiness to the public, even if, and often times especially when, that opinion is negative,” the rating agency argued in a response filed with the court this week.

The insurers, Atlantic Coast Life Insurance and Sentinel Security Life Insurance, are part of Kenneth King’s A-Cap Group. They filed a lawsuit last month asking the court to stop AM Best from issuing the rating and to force it to recalculate.

A-Cap has in recent years built up significant exposure to 777, a Miami investment firm that agreed last year to add the English football club to an esoteric portfolio ranging from low-cost airlines to litigation finance.

A-Cap, which has $11.5bn of assets across five insurers and reinsurers backing life insurance and annuity policies for families across America, had billions of dollars either lent to 777-linked businesses or ceded to its Bermuda-based reinsurer, 777 Re. 

As scrutiny of 777 and its Everton bid has intensified, A-Cap has started trying to recapture those assets and reduce its exposure under pressure from US regulators. AM Best downgraded both 777 Re and A-Cap in the past year, citing concerns over the level of 777-affiliated assets on the reinsurer’s balance sheet and the knock-on for the insurer’s own creditworthiness from recapturing those assets. 

In its court filing, AM Best said that A-Cap had been “promising for months that it was on the brink of raising another $300mn in needed capital” but this had failed to materialise. 

It argued that the asset valuations provided by A-Cap were “unreliable and dated”, and assets being recaptured by the insurer, such as a private holding in an aviation company, would be “extremely difficult” to liquidate in the event of a rush in claims by policyholders.

The rating agency said it also had concerns with other A-Cap reinsurance arrangements, which included the “same types of illiquid assets”.

Evidence submitted by King in a separate filing this week said “one cannot look at a single asset, or even multiple assets, and determine that an insurer has a liquidity issue simply because those assets are illiquid”.

He cited structural protections to reduce the risk of customers surrendering their life insurance contracts. Writedowns to zero by AM Best of certain assets such as Nutmeg, an entity involved in 777’s football investments, had “no justification”, he added.

The insurer also submitted expert testimony using industry data to argue that “without compelling evidence there is no basis to assume that an asset is essentially worthless simply because it may be relatively more difficult to liquidate”.

A-Cap told the Financial Times earlier this month that it intended to recapture its final assets from 777 Re by the end of May. In the filing, King said “to the extent there is any serious execution risk” to the plan to recapture assets and raise capital, this is a risk that “AM Best created itself by virtue of its unwarranted downgrade”.

More than one reinsurer it had been in discussions with to replace 777 Re had paused the talks due to the litigation, King added.

A-Cap declined to comment on the active litigation. AM Best did not immediately provide a comment.