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AM Best, the ratings agency specialising in the insurance industry, has said its credibility risks being “irreparably damaged” if it launches litigation to prevent the downgrade of US insurers linked to bidder 777 Partners, the football club Everton.
The agency is arguing in a New Jersey court that it has the right under the First Amendment to publish its opinion on a company’s financial strength after two U.S. insurance companies accused it of using “flawed methodologies, unreasonable assumptions and demonstrably false data” to downgrade their credit ratings.
“The lifeblood of AM Best’s business is its credibility, and that credibility will be irreparably damaged if the agency is prohibited from making public its opinion of an insurer’s creditworthiness, even when – and often especially when – that opinion is negative,” the ratings agency argued in a response filed with the court this week.
Insurers Atlantic Coast Life Insurance and Sentinel Security Life Insurance, part of Kenneth King’s A-Cap Group, filed suit last month asking the court to stop AM Best from releasing the assessment and force a recalculation.
A-Cap has built up a significant exposure in recent years to 777, a Miami-based investment firm that last year agreed to add the English soccer club to an exotic portfolio ranging from low-cost airlines to litigation finance.
A-Cap, which has $11.5 billion in assets across five insurers and reinsurers that cover life insurance and annuity policies for families across the United States, had either loaned billions of dollars to 777 affiliates or ceded them to its Bermuda-based reinsurer, 777 Re.
As scrutiny of 777 and its Everton bid has intensified, A-Cap has begun to recover those assets and reduce its exposure under pressure from US regulators. AM Best downgraded both 777 Re and A-Cap last year, citing concerns about the size of the 777-related assets on the reinsurer’s balance sheet and the negative impact on the insurer’s credit rating of recovering those assets.
In its court filing, AM Best said A-Cap had “promised for months that it was close to raising an additional $300 million in needed capital” but had not done so.
The company argued that the asset valuations provided by A-Cap were “unreliable and out of date” and that it would be “extremely difficult” to liquidate assets recovered by the insurer, such as a private equity stake in an airline, in the event of a flood of claims from policyholders.
The rating agency also raised concerns about other A-cap reinsurance arrangements that covered “the same types of illiquid assets.”
In a separate motion filed by King this week, one piece of evidence states that “one cannot conclude from a single asset, or even multiple assets, that an insurer has a liquidity problem simply because those assets are illiquid.”
He pointed to structural protections that reduce the risk of customers cancelling their life insurance policies. Write-downs to zero by AM Best of certain assets such as Nutmeg, a company involved in 777’s football investments, were “not justified”, he added.
The insurer also submitted an expert report using industry data to argue that “absent compelling evidence, there is no basis for believing that an asset is substantially worthless simply because its liquidation may be comparatively more difficult.”
A-Cap told the Financial Times earlier this month that it intended to recover its last 777 re assets by the end of May. In the note, King said “to the extent there is a serious execution risk” to the plan to recover assets and raise capital, it is a risk that “AM Best has itself created through its unjustified downgrade”.
Several reinsurers with whom the company had been in talks to replace 777 Re had suspended talks due to the litigation, King added.
A-Cap declined to comment on the ongoing litigation. AM Best did not initially comment.