The counterparty collateral crisis following the failure of Lehman Brothers; the exit of two of the sector’s largest fund managers CatCo and CSAM; the awkward Securis Lloyd’s collateral dispute after Hurricane Irma; investor rancour following the heavy losses from the roll-call of 2017-2022 cat events; and most recently the Vesttoo scandal were all tough challenges.
None, however, were sufficient to derail the ILS express. Indeed, 2023 showed the market to be in rude health. The Swiss Re cat bond index returned 19.6 percent last year – its best performance in over 20 years as the sector benefited from the sharp repricing (and restructuring) of cat risk.
But now a fresh problem has emerged – and from an unexpected source. 777 Partners is a Miami investment fund that has captured headlines worldwide for its controversial asset-grabbing of European football clubs (including a protracted and still live attempt to acquire English Premier League club Everton FC).
But its tentacles also reach into two very different, capital-intensive sectors: aviation and insurance.
Unfortunately, its involvement in both is proving increasingly troublesome. In Australia, its airline business Bonza recently placed itself into voluntary administration and 777 has sold down its position in Canadian airline Flair.
In insurance, there have been signs for some time that not all was well in the camp. For example, 777 – via its subsidiary Brickell (named after the super-smart Brickell Avenue, Miami where 777 is based) – was the largest shareholder in the embattled R&Q before its holding was reduced following a 2022 collateral dispute with ILS fund Vida, which resulted in the latter taking possession of a 12.4 percent stake in R&Q previously owned by Brickell.
This year has seen 777’s insurance difficulties escalate further. For example, AM Best recently downgraded the financial strength rating of its Bermuda reinsurance arm 777 Re to C-, pointing to a “very weak” balance sheet and exposure to illiquid investments. This occurred shortly after the Bermuda Monetary Authority placed the reinsurer into administrative control, thereby freezing the company’s $2.2bn of assets. The complaint highlights the central role the reinsurer has – until recently at least – played in helping finance many of 777’s group interests.
777 is also currently being sued by Obra Capital over the transfer of the ownership of two US fronting companies, Sutton Specialty and Sutton National, to Steve Pasko, one of 777's two principal managing partners along with Josh Wander, in a transaction that went through at the end of last year.
And now 777, its management duo and others have been accused of fraud by London ILS manager Leadenhall Capital Partners. On 3 May, Leadenhall filed an explosive New York lawsuit claiming that its funds have a “collateral deficiency” of $350mn after lending 777 “hundreds of millions of dollars” ostensibly to finance structured settlements. Following a tip-off and meetings with both 777 management and other creditors, Leadenhall claims collateral was either fraudulently double-pledged or was not owned by 777 in the first place.
Its an extraordinary complaint replete with colourful allegations (“a giant shell game at best, and an outright Ponzi scheme at worst”; “house of cards” etc) that may well finally scupper 777’s attempt to acquire Everton FC (what Leadenhall describes as the “latest shiny object of Wander’s fraudulent scheme”).
You can read more about the 81-page complaint here.
Leadenhall owed “more than $600mn”
But while 777 is in the firing line it also looks like Leadenhall – a blue-chip ILS fund manager owned by MS&AD– is itself in a very awkward spot. According to its complaint, in total Leadenhall is owed “more than $600mn in debt”. This is a huge sum – likely reflecting around 10 percent of its entire assets under management (typically estimated at around $6bn).
Will Leadenhall ever be able to recover its 777 debts in full? Unlikely, if its allegations are true that 777 is a “fraudulent” enterprise playing a “never-ending game of robbing Peter to pay Paul”.
There are many other questions: how damaging could it ultimately be to the ILS fund manager and what specific funds will be affected? Who is ultimately behind the mysterious insurance holding company A-CAP, which appears to be pulling 777’s strings (according to the complaint), and who else other than Obra Capital and Leadenhall may also be a 777 creditor secured by double-pledged or non-existent collateral?
In time, we will likely discover the answers. For now, Leadenhall has lobbed a legal grenade into the 777 camp. In fact, it is not the first: Leadenhall says 777 is already facing 16 other lawsuits “generally concerning unpaid debts and collectively demanding more than $130mn”. These include – as we note above – its dispute with Obra Capital.
However, Leadenhall’s allegations appear to be the most explosive yet. The complicated and interwoven nature of 777’s businesses and investments also means the ultimate impact could be widespread and this will surely include counterparties like Leadenhall who find their debts are not as secure as they first thought...
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