Back in early November 2023, I wrote a fairly detailed article explaining the relationship between 777 Partners, Bermuda and the potential purchase of Everton Football Club. It was not a typical article many football fans would be expected (or indeed, want) to read.

Sadly, it’s time to revisit the main players once more – Act II of the play, for want of a better description. The plot has developed, and its significance has widened.

The main cast consists of Everton Football Club, 777 Partners LLC, 777 Re., the Bermudan Monetary Authority and the Premier League

777 Re. is a Bermuda domiciled reinsurance company – it effectively manages the assets and risks for a small number of US based insurance companies owned and managed by 777 Partners LLC. It has approximately $3 billion of assets, held on behalf of its clients.

On the 8th November 2023, AM Best downgraded the financial strength rating of 777 Re. from A- (Excellent) to B (Good) and what is known as the “long term issuer credit rating” from a- (Excellent) to bb (Fair).

Concurrently AM Best placed these ratings under review “with negative implications”. The downgrade reflects the balance sheet assessment from very strong to weak. The consequences of the downgrading are explained in detail in this piece written on 20 November 2023.

Further downgrades

On 16 January 2024, AM Best published a further downgrade with continued “negative implications”, moving Financial Strength Rating to C- (Weak) from B (Fair) and the Long-Term Issuer Credit Rating to “ccc-” (Weak) from “bb” (Fair).

Unnamed sources in The Times on Monday 19th of February 2024, stated that the action by the respected credit ratings agency AM Best has no effect on the company’s footballing operations, nor the takeover of Everton.

So what exactly are the implications?

In common with many private equity owned reinsurance businesses, exposure to private, often affiliated companies and assets has grown. Private equity companies not only saw good investment opportunities but saw such reinsurance businesses as cheap and easily accessible sources of capital. Capital that could be used to fund acquisitions or provided working capital to portfolio companies, helping them grow and even funding operational losses within those companies None more so, than with 777 Re.

An investment pitch to institutional investors from 2021 by Steve Pasko and Josh Wander targeted exposure to private equity, related investments to a level of 65% (against an insurance industry average of 12%).

The movement of their insurance company assets from more traditional asset classes to related private equity assets funded much of 777’s acquisition spree and funded much of their portfolio company operating losses.

To 31st December 2022, 777 Re. had exposure of $26.93 million in related investments and total funds witheld recievable of $1,482.5 million. (Source 777 Re & Subsidiary Notes to Consolidated financial statements Dec 31, 2022) This equated to 49.8% of their total assets. Still short of their 65% target. Remember that these assets are unquoted. That means they are (i) difficult to accurately value and (ii) often illiquid – i.e. potentially difficult to sell when required to do so, during periods of poor operating performance or in poor market conditions. The list of associated investments can be found in this article.

Additionally, many such assets may have expected investment return time frames which do not match the anticipated riskes held by the client insurance companies. i.e.assets and potential liabilities may not necessarily be matched.

Back to the ratings from AM Best:

The ratings report for 777 Re. cites several areas of concern including:

* Very weak risk-adjusted capitalisation

* Materially significant exposure to affiliated assets (see above)

* Great deal of uncertainty over liquidity of affiliated investments (see above)

* No audited statements from 777 Partners LLC since 2020

* No audited financial statements for 2022 fom Bricknell Insurance Holdings (777 Re’s immediate holding company)

*Material turnover in its board of directors & executive team

*No appropriate structure for its risk profile

* Investment guidelines bypassed with board approval

* Company has plans to reduce exposure to affiliated assets but with significant operational risks.

All of which present an extremely challenging environment for 777 Partners LLC but particularly in the context of not just credit rating concerns, but also regulatory concers.

As cited earlier in the article, exposure to private, affiliated investments has grown significantly particularly among private equity owned insurers. Globally, the regulators, and in this case, the Bermuda Monetary Authority have been aware of this trend and have started to express concerns as to the potential impact of such strategies. As a result remedial actions in the form of stronger regulation follows.

So much so that the Bermuda Monetary Authority issued a comprehensive paper on 18th December 2023 titled “Supervision and Regulation of PE Insurers in Bermuda“. Included in this paper is new licensing, supervisory collaboration, intensified supervisory engagement, recovery and resolution and specifically a new range of powers. Part of these new powers allows for enhanced capital requirements (perhaps 150%). This, especially in the context of the AM Best reports on 777 Re.’s balance sheet would put huge additional financial strain on something that is already considered to be “very weak”.

In order not only to maintain the necessary credit ratings to write new business and maintain their existing book of business, 777 Re. faces a huge regulatory hurdle. The areas of weakness highlighted by AM Best contradict entirely the new tougher, enhanced regulatory requirements of the Bermuda Monetary Authority. Not only do 777 Re. have to dispose of illiquid, affiliated assets but they need to significantly upgrade and improve their board, their processes and ensure that all of the operational risks associated with the above are properly mitigated.

In simple terms

In simple terms all of the above means 777 Partners will have less new capital to work with, they will have to dispose of some of their best perfroming assets and dramatically improve the quality of their board, executive and processes (doesn’t that sound familiar to all Evertonians).

Of course, 777 Re. is not the only source of capital available to 777 Partners LLC and their portfolio companies. 777 Partners LLC have a close association with another insurance related business – A-Cap, Chaired and run by Kenneth King. As has been extensively reported by Josimar, A-Cap have been significant providers of capital and especially in 777’s footballing acquisitions . However, they face their own regulatory concerns and in an environment whereby investing in private equity owned assets becomes more expensive and capital intensive one can reasonably question how long this increased exposure can be maintained. Additionally, and importantly, 777 Re.’s rapidly declining credit worthiness and financial strength will add further questions to A-Cap’s own internal risk management and audit processes as to the wisdom of continuing to increase their exposure. Additionally, it is not unreasonable to believe A-Cap’s regulators may take a greater interest in their 777 and related exposures.

Elsewhere across 777 Partner’s portfolio of businesses the requirement to divest 777 associated investments will have several consequences. In 2022, related companies and the 777 Partnership received almost $1 billion of 777 Re.’s capital – a trend that now has to be reversed. Not only will some (presumably the best performing) be sold, but survivng businesses will see capital recalls or face harder conditions in which to raise fresh capital through third parties.

Difficult to square Josh Wander’s & 777’s claims

This is where it becomes difficult to square Josh Wander’s & 777’s claim that none of the above impacts 777 Partner’s football related businesses and particularly, their proposed purchase of Everton. The multi-club operation collectively remains loss-making and therefore needs the financial support of 777 Partners or third parties. Everton have an acquisition cost, we have debts of circa £1 billion (including Moshiri”s shareholder loans) – more than half owed to third parties and attracting interest costs. We have a continued, significant Capex requirement – the stadium, reinvestment in the squad and the funding of operating losses – let alone the contingency requirements and much greater financial support needed if we were relegated.

777 Partners LLC are facing intense scrutiny by the Premier League as to their suitability as new owners. Aside from the multiple claims of poor business practices including within their existing football portfolio, 777 Partners LLC ability to fund Everton, particularly in the context of their own loss making businesses and the new capital and financial constraints detailed above, is at best highly questionable. Declining financial performance makes it even more difficult.

Greater regulatory control and pressure in football (the independent regulator/Premier League power struggle) and now increased regulatory pressure on 777 Partners LLC and their funding partners, particulary among private equity owned insurers, compound 777 Partners challenges.

The considerable challenges 777 Partners faced back in the early stages of this process have expanded considerably. 777 Partners have lost key staff in their footballing operations, their most senior financial officer, are not blessed with a balance sheet full of cash, face a deteriorating ability to raise fresh capital and an increasing degree of scrutiny and accountability by regulators.

Their ability to acquire Everton Football Club has worsened exponentially at the very time when Everton’s circumstances have deteriorated even more sharply. It would be highly irregular and imprudent to suggest that their acquisition could be approved. 777’s resources are not there and Everton’s financial and managerial requirements have intensified beyond all recognition.

As custodians of the game and with their duty of care to Everton Football Club, the Premier League and Farhad Moshiri cannot allow this to happen. For the sake of all parties, not least the fans, we need to allow an alternative solution to Moshiri’s self-determined existential crisis.