Kenneth King’s webinar 27 February 2024

I fully appreciate it won’t be for everyone, but for completeness and given the level of attention it has attracted in the UK media and particularly the ongoing 777 Partner situation at Everton, I thought it worth placing as a matter of record.

There’s both an audio recording of the webinar and a full transcript. The full transcript shows in bold the relevant 777 Re. and 777 Partner comments.

Major points to note though – the ending of the A-Cap 777 Re relationship, the time frame (45-60 days), the nature and size of the relationship.

Although this obviously focuses on A-Cap which is of no concern to Everton directly, it hugely impacts the amount of capital available to 777 Re and by definition 777 Partners and associated businesses. Reasonably, it is fair to deduce that it reduces their ability to raise additional capital and increases the cost of any such raise – if indeed possible. All of which impacts 777’s planned takeover of Everton and the future cash requirements of such a takeover.

A-Cap’s corporate website can be found here , 777 Partners website here, 777 Re.’s website here, and AM Best’s 777 Re. downgrade press release, here

Audio of Kenneth King’s webinar

Transcript of Kenneth King’s webinar:
They collectively had about $40 million in capital, and they were probably writing somewhere around $400 million in premium. The company has grown significantly since then, and its capital position has commensurately grown and gotten stronger over this 10 -plus year history, where now our capital position is over $400 million.

Our annual premium writings are approaching $3 billion and are on pace to significantly outpace that. Today, our risk -based capital measures have increased. Our BCAR measures, which is the best capital -adequacy ratio measures as we calculated internally, has increased. And perhaps most importantly, our ability to raise capital and to have a reach into really strong reinsurance partners has changed over the last 10 years as well.

I say that knowing that 777 Re has been disruptive to A-CAP in the sense that they went from an A- rating in November to a C- rating published just the other day, and that’s unfortunate for a lot of reasons, one of them being that the company wasn’t managed the way it needed to be, but secondly, it’s created an emphasis for the rating agencies to punish insurance companies that use unrated reinsurers.

And so, we’ve been lucky and fortunate to not have a whole lot of unrated reinsurers, but we think of 777 Re as now being an unrated reinsurer, and we’re actively taking steps to correct that.

But today, I wanted to talk a little bit more detail about just A-CAP’s financial strength as we head into, you know… Completing the first quarter and then talking very candidly about what the am best action was the other day And what it means to us at A-Cap. Talk about the 777 Re. relationship and then talk about what we’re going to be doing on a going forward basis So with that I probably have about 15 to 20 minutes of prepared remarks and Then we’re as Brian said very happy to Answer any questions anyone may have relative to what we’re doing

So yes in the news on on Friday you all There was a press release release from AM Best Where you know I always try to take the positive first and you know our B++ rating was affirmed and that to us is the most important rating that we have because it’s the one that we think the origination force most relies upon. That being said, there was also an outlook, a negative outlook, and under review.

And to us, what that means AM Best wants to see us sort through our capital raise and work with our reinsurance exposure to make sure that we take corrective actions over the short period of time, which is typically a six -month period of time.
I would say that we’ve already taken corrective actions already, but AM Best really wanted us to complete our annual financial statements, which is occurring in the next week or so, and then sit down with them at the end of the March to begin to sort of lay out the things that we’ve either completed or relying upon.

I say this because it’s important to note that we don’t think that AM Best action was warranted. We do believe that they wanted to do something to address the 777 Re. issue, and candidly, in some cases, you know, they had them at A -minus, you know, and they quickly downgraded them. So I think there’s some responsibility on their part.

But all we can do at A-CAP is continue to manage our capital position strongly and grow it in a smart way. You’ll never see A-CAP grow too fast. You’ll see us constantly raising capital, which we have. If you think about the numbers I just presented, we went from 40 million to over 400 million dollars. But we’ve also, from a capital equity standpoint, capital adequacy standpoint, AM Best candidly didn’t know what to do with us, right, because our capital position is still strong, and I felt that they needed to send a message, and they did. They sent a message to the market, but we also feel really comfortable about the strength of A-CAP and the actions that we’ve already taken to deal with the added attention that AM Best wants us to correct, or all the issues that AM Best wants us to correct, and also the added attention that 777 Re. is brought to the market.

So just to sort of summarize on some of our highlights, we have over $400 million of capital. We have about $270 million of what I would call statutory BCAR capital. And then we have over $150 million of capital that’s just dedicated to our reinsurance performance. And that’s a little unusual for some in a sense that when carriers go present their capital position, they usually have all of their capital allocated solely within their writing company.

A-CAP took a more conservative approach by taking capital and allocating it to our reinsurance partners. and keeping most of the capital to write business off of, but really have the discipline of having controlled growth and writing off a smaller capital number, and then also having reinsurance capital to support all of our performance. And so we feel very good about the capital position, the strength of A-CAP as we head into 2024.

I just want to sort of illustrate where the capital is coming from relative to A-CAP. So this is something, I just referenced the over $400 million, but if you look at Sentinel and Atlantic Coast Life, that’s essentially the $265 million that I referenced previously. There’s $145 million in Sentinel, and there’s $120 million in Atlantic Coast Life. That’s the capital that we present to AM Best to measure our statutory BCAR. And that’s the number that we use to write business on.

The remaining components of this schedule shows our affiliate insurer having over, our affiliate insurer is having about $150 million of capital just to support the reinsurance activity that Sentinel Atlantic Coast Life write.

So regardless of the noise that we have within the reinsurance sector, we’ve already put aside a significant part of capital just to support the exposure of the rated entity.

If we go to the next part of the discussion, you know, specifically 777 and the downgrade, I just wanna reiterate or point out a couple of. of important things that we need to think about relative to our reinsurance relationships.

There was no, and there is no financial impact to the A-CAP affiliates related to AM Best downgrading 777 Re. from A- to C-. And that’s because the exposure, the reinsurance exposure is fully supported not only by collateral that’s kept on our accounts or the investments that are made by 777 Re are already held in our account, but we also have set aside additional capital that I pointed out previously to support it. So there’s absolutely no risk, financial risk associated with the performance of 777 Re because we’ve effectively removed it all from our rated carriers.

Out of prudence though, and really to take candidly some of the noise off of us, we are in the process, and began the process of recapturing 777 Re’s business and moving the business to a A- or better rated company. And we’re doing that in three specific scenarios. One for our MIGA business at Haymarket, and then two more times for our app products, both in Sentinel Security Life and Atlantic Coast life.

There’s been some reporting that that position, and I think I AM Best even referenced that we are taking on new premium.

We haven’t terminated the contracts and that’s for good reason. To shut off the flow of liquidity to our reinsurer would have paralyzed them and essentially created more risk to ACAP. So we’ve been very selective and control the cash, very selective about new cash coming in to support the existing relationship and to be set aside to handle any exposure that we may have.

I will say that in our discussions with AM Best, they’ve already factored in additional charges related to 777 Re, and those charges for, although they’re somewhat aggressive and conservative, it has no impact on how we model our BCAR. And in fact, I would say that in the press release, there was a reason that no BCAR was published because AM Best candidly doesn’t know how to deal with the strength of our company and our capital position and trying to figure out what to do and how to respond relative to the 777 Re. issue.

So I looked at that as a positive data point and I look at the AM BEST blueprint for us. They’ve laid it out and we did work on the press release with them. The blueprint was for us to complete our capital raise which we started back which we started planning back in November and December that we started to complete our offering documents and began having discussions with some close relationships in early January and were expanding the discussions into March.

I will tell you that we’ve already received the committed term sheet for $300 million out of the $400 million capital raise. I will tell you that we’re very confident that investors want to participate and invest in the A-CAP platform.

I will also tell you that the noise has just made it a little bit more expensive. We were going to get capital at a relatively cheap level. And now it’s becoming a little bit more expensive, but it’s completely accretive to the A-CAP platform. And all the proceeds will be used to support the business of Atlantic Coast Life and Sentinel Security Life as we have them designed today. So the capital raise is to completely support the business platform.

So we’re very excited about that. We’ll probably do it in a couple of stages. We’ll probably close on a hundred million dollars in the next 45 days, and then complete the final capital raise by the end of the second quarter. That will fit well in line with the pause or the timing that I just outlined about AM Best and having some support within a six month period of time.

We do believe that A-CAP, its BCAR, its capital strength, as it stands today, currently supports a B+ rating. There’s no doubt, no concern about that. And when we sit down with AM Best and go through trying to finalise a capital model and a plan, we believe that will play out.

The capital that we’re talking about raising simply takes us from a $400 million company to an $800 million company. And we continue to be prudent on how we write premium and the growth that we have. If you look at our current leverage, which is our premium to our gap capital, we write, for every dollar in capital, we write about eight and a half dollars of premium, right? And have reserves of roughly eight and a half times the dollar of premium we have. So we are a very low levered company to begin with. We wanna continue to build on the disciplines of becoming an A- rated company. So the additional capital just removes any doubt of that, actually moves us towards getting it, never mind getting off the watch, but moving us towards… of course, the capital position of an A- rating company and that doesn’t change. That’s been the plan. It will continue to be the plan and we fully intend to execute upon it.

The last slide, just back to reinsurance and the strength of the model. Kayla, I wanna go to the fourth, like table four that shows the bar graph. Yes. So this slide’s worth mentioning because I think A-CAP is in a unique position that other companies are not, candidly. The blue box is to use color. The blue box represents the maximum loss exposure that we have on our reinsurance relationships. It looks at the asset charges that you would have for NAIC ratings. There’s a level of conservatism put forth on it. And it basically says that. Within the confidence level, 99 .6%, our current capital is four times greater than all of those situations that could occur, right?

So we are over -capitalized currently today from a reinsurance standpoint, and we will continue to monitor this exposure, make sure that we have sufficient capital, and the additional capital raise doesn’t need to go in to support our reinsurance exposure, it just needs to go in to support Atlantic Coast life and Sentinel Security Life and make sure that it continues to be the best partner that it can be for our distribution sources. Those are the only prepared remarks that I have.
I’m welcome to open the floor for any questions. I’m hoping that was clear, but certainly welcome any questions to clarify any points that I made in the opening remarks. As just a reminder, if anyone has any questions, please feel free to type them into the Q &A and we’re monitoring that so we can take them there.

Okay, I have a question, and I’m going to paraphrase it, and I’m just going to make sure that I capture it right. I think the question was, prior to the 777 Re. issue, what was keeping Atlantic Coast Life and Sentinel Security Life at a B++ rating?
And I thank you for the question, because we think it should have been at an A -rated end -to -date. And what I will tell you is, over the course of the last six years, A-CAP developed a plan to move towards an A- rating. That plan consisted of delivering consistent stable earnings that were not volatile, the plan to get our capital position. to $400 million because at the time when we’re on a current, we’re with a current, a new team of AM Best analysts. And what was discussed with the prior team is that our peer group within the A minus level, we’re at a $400 million aggregate capital number. And so the goal was to get to $400 million and we did that. The other part of the goal, some of you that may know us longer, we used to be associated with a long -term care carrier called Ability Insurance Company that operated in the life insurance space.

And AM Best said, you know, that’s bringing your rating down. You need to get rid of it. And so, and they said, we don’t think you’re gonna be able to sell it, but good luck and we were able to sell it. So that was a rating factor as well. And then just time, it’s so interesting. AM Best takes forever to upgrade you and they’ll quickly shoot to downgrade you. At least that seems to be the current environment. So we did get upgraded in the sense of the ICR and the ICR stands for an issue accredited rating.

And for those of you who don’t know, that rating was really AM Best’s attempt to try to match their ratings process to S&P and Moody’s. That’s the easiest way that I can explain that. And so it took us two years and the prior rating team to get us from BBB to BBB +. And so the next step was to, and because there was a bias towards our capital structure and our reinsurance relationships.

So what we did at the beginning, I believe of 2023, was raise $100 million in capital. So we solved that issue and we got over $400 million. And the other piece that we needed to do was create a better stable of reinsurance partners, which we did. And unfortunately the 777 Re. is a bump, but we felt like we were already at the A-. level before the 777 Re. issue occurred. But thank you for the question.

The question was, the next question, thank you for the questions, do we see 777 Re. going away from us at some point? And the short answer to that is yes. But it will take time.

You know, as I said to you before, I think everybody in the world wanted us to recapture immediately. And, you know, candidly, that was a relationship that we had, that was in good standing until AM Best took action. And I, you know, I think I believe AM Best needed to take action.

We can debate whether it was to go from A- to C- so quickly. But A-CAP is a smart but loyal counterparty and partner. And what I mean by that is We didn’t just take and shoot 777 at the time, maybe that’s a bit of an analogy, but we didn’t take aggressive action against 777 because we felt like we had full collateral and security of all of the assets, we had transparency of all of the assets.

We didn’t believe we had any risk in the assets. And we didn’t shut off liquidity because we thought that would put them in a worse position. And so we were very methodical to get through that. And there has been a significant amount of pressure put on us, including from AM Best, to exit the relationship.
And so we do think after we’ve stabilised the company, we do think it’s in the best interest of A-CAP to exit the relationship entirely from 777 Re, but that’ll take some time.

We expect that within 45 to 60 days, we’ll recapture all of the business and we will move on and we will replace it with an A -rated carrier. So we’re not going to take the business on and put pressure on our capital. We’ve already found partners to take the business. And we have one term sheet for about a billion dollars of the business and then we’re working the other two contracts that I referenced before.

So from our standpoint, yes, we will be exiting the business with 777 Re. It’ll take something like 60 days, but we think the actions that we’ve taken between November and now have helped protect A-CAP. And we didn’t want to react too quickly and just recapture. Thank you. you So, there was a question about the AM BEST process, the follow -up review, and then I think the annual review or periodic review. Those of you who may know that the AM Best process is an annual process. However, they recently instituted a policy, which I think is a good one, to do six -month reviews.

So the 777 Re. issue happened roughly at our six -month review from our last rating, which was affirmed back in May or June, I forget the exact period of time. But we welcomed the review and it was important. The most immediate thing that we’re planning for now is that this watch or under review is a six -month process. We would like to get out of the review process within the next two months when we finish the cap and raise and recapture the 777 Re. business.

So that’s sort of our media timing to have this re-evaluated within two months with AM BEST to complete the activity. We’re completing our 2023 financial statements, we still wanna take a look at, and we’re gonna really work closely with them to evaluate the total situation. As I mentioned earlier, without the capital raise, and with the reinsurance collateral we have in place, we didn’t think AM BEST needed to take any action. But we’ve now taken on the battle cry, if you will, for lack of a better word, to complete our capital raise and to get the recapture done, so we can quickly move through the review process and then get back on the annual review process.

The question was, what effect will any of this happen, have on either Atlantic Coast Life or Sentinel Security life? You know, I’m one of those types of people that when we see a situation, we try to make the best out of it, and we take actions affirmatively and decisively to address any of those concerns. So, that’s a long way of saying that Atlantic Coast Life and Sentinel Security Life are going to emerge stronger than ever after we get through this process. It has no immediate impact on Atlantic Coast Life and Sentinel Security Life. They both continue to be rated B++. We continue to be what I would call a stable partner with the IMO world. We have consistency in our product development, consistency in support. our pricing, particularly with MIGA, which is a very commodity -based product. I mean, we continue to be supportive of that and continue to hold our pricing firm. We don’t put gimmicky products out there. We put strong products that are consumer -based. We listen to the input that we have from our partners on the origination side.

So we think this will have no impact on Atlantic Coast life or Sentinel in the short run. And we think Atlantic Coast Life and Sentinel Security Life are going to emerge even stronger. And we think that our commitment to, frankly, you folks will continue to show out and will continue to have very strong product and capabilities.
Yeah, there was one follow -up question to what I just mentioned about product competitiveness. I think we have an incredible suite of products that handle, you know, the commodity -based MIGA products. I think in January, you got to make sure I get my ears right here, in January of 2023, after a budget meeting we had in November of 2022, we realised that we can offer a three -year MIGA product that was going to be very competitive and strong, and it actually fit nicely within our investment profile. And those are the types of things that we do.
We tried to, we feel like we were a leader in a three -year MIGA product, and we did that and we executed really strongly and continue to be a market leader on that product. We continue to keep our MIGA pricing. When there’s volatility around interest rates, when we set a price, the one thing that we do really well is we match up our risk profile, our capital position, and our investment pipeline. And we try to pass those benefits on to our policyholders, so that’s why you see our products on the commodity -based side being very competitive. On the index side, you know, whether you’re talking about an income product or an accumulation product, we have very specifically designed products that we think are beneficial to the market. I think we’ve recently increased our benefits to be competitive, but they’re products that we want people to stay on and policy holders to continue to participate on for an extended period of time. We’re not looking to trap a policyholder by giving them an aggressive rate in the first two years and not be there for them when they need us. So I think over the long haul, we’ve developed very competitive products that we believe are sticky, and we want to continue to build on that.

Yeah, I made a comment about AM BEST not knowing what to do with our capital strength and just maybe spend 30 seconds more on that. A-CAP’s position is that there should have been no action taken on us because our BCAR is very strong and our BCAR is the way AM BEST measures our capital. It’s not exactly the same, but it’s pretty similar to how someone would calculate an RBC. And I think our RBCs are going to be 600 or higher at the end of the year, so they’re very strong. We also have easy access to capital, and we have a demonstrated track record of raising capital.

So the point about AM BEST, you know, right or wrong, and hopefully I don’t get into trouble for this comment, I think they needed to take an action. I think that there was pressure for them to take action. For anybody that had a relationship with 777 Re. I don’t fault them for that, and I don’t want to sound like I’m being whiny here. I’m going to take this opportunity to be stronger by it. We don’t agree with their position, as many of you who know me probably know that I wouldn’t agree with it.

But more importantly, is we manage our capital so precisely, and we try to arrange capital so we can deal with a rainy day, and our aggregate capital is above that $400 million, that we should be able to sustain a little bit of noise, and this is just a little bit of noise in the reinsurance sector. I think when you go from $400 million to $800 million, if a similar situation happened with a reinsurer, there probably would be no action on us. I don’t think AM Best knows how to handle, when I said that, how to evaluate our capital position and the need to take some action relative to the 777 Re. issue at large. Hopefully that clarifies for people.

The question, the next question was, and I hope this is all helpful to all you folks, I’m trying to be as transparent and candid as possible. The question was, am I aware, I think that, I’m paraphrasing, am I aware of the assets that are backing the 777 Re. contract?
Both in terms of the quality and allocation, and the short answer is, yes, we are aware. And we’re also very active at repositioning and selling those assets. And I think by last count, there was over a billion dollars of what would be called 777 Re. type assets that have either been reclassified. sold, repositioned, moved out of the reinsurance contract. Because the issue with 777 Re. was not an asset quality issue, it was a liquidity issue. And that goes back to my prior comments, which I wasn’t going to necessarily shut off liquidity when this first happened. By keeping liquidity available, managing the relationship, we’ve been able to sell a significant amount, work with 777 Re. to divest in a large portion of their assets that were in question and also set out a plan that will fit right into the recaptured discussions in terms of moving assets to the new reinsurer that have different characteristics.

And during the process, I will say that it was a transparent process. We were aware of all of the assets that what they were being underwritten on. I will also tell you that the issue… The asset’s all satisfied investment statute, whatever the relevant investment statute was. There’s probably a larger aggregation of affiliated investments if you took a pure definition of it.

But what we’ve tried to explain to people is the reinsurance contract we have with 777 Re. is a modco. And what that means is the lender is an ACAP entity. It’s not a 777 entity. And typically when you look at affiliated type of transactions, you worry that decisions might be made at the expense of the debt, which the insurance companies hold, that would benefit the equity. The opposite is true here. There were no decisions that could be made by 777 for any affiliated transactions that would impact the level of the debt or be at the expense or cost to the policyholders that benefit the equity.

We had the disciplines because of the modco and we were closely monitoring all transactions. So that particular situation wouldn’t occur. A couple of questions have come in with specifics of the financials. The financials will be available in a week or so, but just, you know, I’ve given you the capital number that will be on our 2023 financial statements and I pulled up a schedule showing what we think that the targeted capital will be for each of the entities. From a premium standpoint, we wrote just under $3 billion last year.

But again, all that information will be available and including the reinsurance relationships will be available once we complete the annual financial statements. So I can’t really take specific questions relative to that because one, I probably wouldn’t get exactly right. And we’re about a week away from final and publishing our financial statements.
But there was another question. Let me just make sure I get to that.

Right, so there has been mis-reportings of the relationship between A-CAP and 777. And so I just wanna say a couple of comments just to make it crystal clear.

A-CAP and 777 are not affiliates by any definition. A-CAP is a lender to 777 for businesses outside the reinsurance relationship, and ACAP is a seeding company to 777 as a reinsurer. Those are the relationships. There’s no affiliation relative to two entities.

Like every relationship we have, if you were to talk to any of our reinsurers, let me take a sip of water, sorry. If you were to talk to any of our reinsurers, you know, they would say, you know, A-CAP is very selective in who they pick as a reinsurer, and A-CAP believes in developing, harvesting relationships with its reinsurers to do things beyond reinsurance, and we’ve done that in each of our cases, not just with 777. So that’s the type of partner that we are, but we make sure that there’s no affiliation associated there, too. you

Yeah, I mentioned the withdrawing from 777 Re. within a 45 to 60 (day) period of time. We’re confident that we can execute on the recapture given the relationship we have and certain rights that we think we would have under the contract.

With that being said, because the heavy sale of assets that have already occurred and the repositioning of many of 777 Re’s assets, I think I mentioned a billion dollars before, even if that was to not occur, there would be no risk to A-CAP whatsoever in terms of the transaction. I think from an AM Best standpoint, that’s also true because they would look at the collateral that’s back in the reinsurance and they would begin to get more comfortable with any exposure that 777 Re. may have. So it’s really a combination of efforts that we’ve already started and that we want to complete that make us feel comfortable that AM Best will react positively, but more importantly, we’ll position the company even stronger than we are today.

Thank you. I think we’ve kind of run a timeline and I don’t see any more questions that we haven’t addressed. or that aren’t repeat in nature. Are there any more, keep the window open for another 30 seconds. But I hope this has been helpful. I always end every meeting and our partners, some of our key partners will tell you, I thank you again for your business. We never take our business for granted with you. A-CAP is very excited about its future, its capital position, its ability to deliver strong products. And we look forward to keeping the communication lines open and being able to continue our relationships with you folks and being very successful. So again, thank you.

Thank you for your time. And I think we might plan one or two more of these in the near future where we can provide updates. I ask, I fully encourage all of you to speak to either the principals at your firm, if they wanna have a more direct dialogue with me, but we certainly welcome any further conversation.

It’s back to work, it’s back to work. It’s back to implementing the plans that we talked about. It’s back to closing the financials and it’s back to continue to sell great premium. So thank you all for your time. And I look forward to meeting some of you in person or having further discussions in the future. Thank you.

Ends.