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VIRGINIE LEFOUR

Mary Williams Walsh is the managing editor of <a href="https://www.news-items.com/" target=_blank>News Items</a>, an independent daily newsletter, which published an earlier version of this op-ed.

Without meaning to, the world’s soccer fans and sportswriters have opened a window into the secretive but influential world of Bermuda reinsurance. Just a glimpse is enough to raise concerns about the retirement security of millions of Americans.

We’re talking here about people who have either earned a defined-benefit pension at work or bought an annuity from a life insurer. No one ever asked them whether they would like to have their nest eggs moved offshore, or leveraged, or put in the hands of a non-U.S. regulator.

But increasingly, this is what’s happening. Countless Americans now depend on the skill and dedication of the Bermuda Monetary Authority, and they don’t even know it.

Indeed, hardly anyone would know it if it weren’t for soccer fans and journalists who wanted to figure out how a certain private investment company in Miami could afford to buy Everton, a Premier League soccer club in Liverpool. American insurance customers aren’t informed when their annuities are moved offshore; the deals are confidential. But in the process of their investigations, the sportswriters traced the Everton buyer’s offshore money back to the U.S. insurers it came from, found investments incompatible with retirees’ needs (and possibly with U.S. law), and forced more than $1 billion worth of reinsurance to be sent back to where it came from. A transaction like this can hobble a U.S. life insurer. The Bermuda reinsurer in question might not survive.

To understand how this happened requires a bit of background on old-fashioned company pension plans, annuities and how life insurers work with reinsurers.

In recent years, many of the American companies that were still operating employee pension plans have sold them off to life insurance firms. This has quietly changed things for the pension recipients: They still receive the same amount of money, but their pensions are no longer covered by federal law and insured by the federally chartered Pension Benefit Guaranty Corporation. State insurance law kicks in, and this varies from state to state.

Then, very often, the life insurers pay reinsurers in Bermuda to <a href="https://substack.news-items.com/p/pension-buyouts" target=_blank>take over the obligations</a>, under a whole new set of laws and investment rules. The British territory has a long history of hosting the reinsurance of specialized, big business equipment, such as oil rigs, and it offers companies less red tape, lower costs, a good tax climate and privacy. But the reinsurance of retirement obligations is relatively new, and it’s not at all like reinsuring an oil rig. There are people involved.

It’s not just pensions. Life insurers are also reinsuring the annuities they’ve sold to retirees directly. They package the contracts into “blocks,” then reinsure the blocks, often in Bermuda. The reinsurance increases their capacity, so they can write more new business without being overwhelmed by all the obligations. And there’s plenty of new business to write, with some 11,000 Americans now turning 65 every day. Those with decent retirement account balances can use the money to buy lifetime income — an annuity. Last year Americans bought about $360 billion worth of annuities, a record.

The United States’ big private-equity firms have gotten into the annuities business and have been moving it offshore. Apollo Global Management was the pioneer, with a big Bermuda-based reinsurance division, Athene. Annuities mean cash flow, because the people who buy them pay premiums to keep their contracts in force. Apollo made so much money investing all of Athene’s premiums that soon many other private-equity firms were setting up offshore reinsurers and doing the same. They don’t all do things the same way but, in general, there are three steps: A private-equity firm buys up blocks of annuity contracts, an affiliated reinsurer assumes the obligations offshore and an affiliated asset manager invests the money.

Reinsuring offshore adds leverage that the annuitants know nothing about. The reinsurers can remove some of the capital that life insurers in the United States are required by their state insurance commissioners to hold. There are also big tax advantages. And, offshore, asset managers don’t have to load up on conservative bonds; they can make complex custom securities, such as collateralized loan obligations.

Want to follow the money? You can’t. In the United States, a retiree researching annuities can get a list of all the investments a life insurer holds to back its promises, because it’s public information. In Bermuda, the investments are secret.

This is why we should thank the world’s soccer fans and journalists. Last fall, when a private investment firm in Miami, 777 Partners, made a bid for Everton, part of the money was to come from its Bermuda reinsurer, 777 Re Ltd. — a cash cow taking in premiums from annuitants all over the United States.

An affiliate, 777 Asset Management, invested this money, favoring sports. When 777 Partners bid on Everton, it already had stakes in soccer teams in Europe, South America and Australia. But the Premier League is picky about investors. Its due diligence moved so slowly that sportswriters pushed to find out why. Soon, <a href="https://substack.news-items.com/p/a-huge-trend" target=_blank>thanks to their digging</a>, all sorts of dirty laundry was hanging in public. It turned out that 777 Partners’s co-founder, Josh Wander, was being hounded by creditors in many jurisdictions, and the debts ranged well into the tens of millions. Wander’s firm also had a jet-leasing business whose planes were being grounded and repossessed. And he had once pleaded no contest on drug charges.

Then came the revelation that 777 Re could not provide audited financial statements for the past two years. This is unheard of in life insurance, where policyholders typically pay premiums for years before they receive any payouts. No one would do this without knowing the company was sound.

The Bermuda Monetary Authority quietly put 777 Re under administrative control, and A.M. Best, a specialty ratings firm, downgraded it in two steps from A-minus to C-minus — close to a death sentence. No one can do business with such a weak reinsurer.

When a reinsurer is in trouble, the problem can spread. Its life-insurer counterparties can’t very well leave their blocks of business there, so they take them back — if they can without being swamped. If they are swamped, a state insurance regulator can close them.

When A.M. Best downgraded 777 Re to C-minus, it also downgraded two counterparties, though not by nearly as much. These were Sentinel Security Life, regulated by Utah, and Atlantic Coast Life, regulated by South Carolina. They’re both part of a family of life insurers owned by Advantage Capital Holdings, or A-CAP.

The ratings firm put them “under review with negative implications,” which gave them time to escape the Bermuda triangle. It warned that they might deplete their required capital when they took their annuity obligations back. A.M. Best said it would see when they were done and issue new ratings then.

In February, Kenneth King, the CEO of A-CAP, <a href="https://substack.news-items.com/p/a-huge-trend" target=_blank>held a webinar</a> to tell insurance brokers that they could still sell his companies’ annuities, that the reinsurance contracts were still in force, and that he had a plan to unwind them carefully. Rather than shut off business to the reinsurer, King said, he was raising new capital, about $400 million, and finding new, A-rated reinsurers that could take the obligations away from 777 Re. He said that as of March 1, 777 Asset Management was no longer authorized to invest the premiums.

This was a webinar for brokers, but sportswriters were sitting in, too. Some of them reasonably concluded that King was saying that the 777 Re cash cow was dead, and the Everton deal was off.

Yet when asked about Everton last week, a 777 Partners spokesman said the firm remained “confident in its ability to fund both the transaction and the Club’s three-year business plan.” He said that 777 Re was solvent, and disputed reports that its audited financial statements were missing. This could not be confirmed; the information is confidential.

The annuitants are still paying their premiums as if none of this were happening.

So, maybe 777 Re is insolvent — or maybe it isn’t. Maybe it has squeaky clean audits — or maybe it doesn’t. Maybe King will disentangle his life insurers from 777 Re and stop the bleeding. For the annuitants’ sake, we can only hope so. But with so little transparency, it’s impossible to be sure.

The biggest question, whether 777 Re is an aberration or a harbinger of more trouble to come for annuities, is unanswerable. But annuities are hard enough for ordinary Americans to shop for without having to worry about other bad apples in Bermuda’s barrel. The next time something like this happens, there might not be any sportswriters around to give us a heads-up.

Mary Williams Walsh

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How did so much U.S. retirement money end up in Bermuda?

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