Utah issues order for A-Cap insurers to stop doing business due to reserving concerns

Utah Insurance Commissioner Jonathan T. Pike signed an order Monday barring Sentinel Security Life Insurance Co. from writing new business in the state after Dec. 31.

The insurer is in such poor shape financially, Utah regulators say, that it is using new premium to meet ongoing financial obligations as they come due.

The order also covers two associated reinsurance companies: Haymarket Insurance Co. and Jazz Reinsurance Co. The three companies share the same Salt Lake City address and are owned by Advantage Capital Partners, known as A-Cap.

According to Utah examiners, the three insurers “are in a Hazardous Financial Condition and that such condition presents an immediate and significant danger to the public health, safety, or welfare, and that immediate action is necessary and in the public interest.”

A spokesperson for A-Cap released this statement Wednesday:

“A-CAP vigorously disputes the flawed valuation conducted by an unqualified firm. A-CAP stands by its valuation work, which was validated by two highly qualified and independent valuation firms, and is challenging the Order to protect its policyholders, its investors, and the interests of the broader aviation leasing industry participants.”

It has been a difficult year for the group’s insurers.

According to reporting by Semafor, A-Cap sold blocks of life policies to 777’s reinsurance arm, while separately loaning hundreds of millions to 777 Partners itself and various portfolio companies.

In a May lawsuit, Leadenhall Capital Partners, a London-based asset manager, claimed that it provided 777 Partners with more than $600 million in financing. Leadenhall said it later learned that roughly $350 million in assets serving as collateral for the loans either were not in 777’s control or had already been pledged to other lenders.

A-Cap is also named as a defendant, with the firm telling the New York Times that the claims are “baseless.”

Also in May, Sentinel Security and Atlantic Coast Life Insurance, another A-Cap insurer, sued to prevent AM Best from downgrading their financial strength ratings from B++ to B-. That lawsuit was later settled.

Examination irregularities

Pike ordered a "full-scope financial examination" of the insurance companies covering the years 2020 through 2023, the order states. An independent contractor performed the examination and found several problems, the order says:

• More than 10% of the companies’ investments are in a single entity in violation of Utah code.
• The companies’ risk-based capital ratio, a key indicator of financial health, has declined.
• The companies’ investment portfolios included "a disproportionately large number of high-risk investments."
• The companies hold investments in more than thirty loans or loan packages.

The examiner hired Harvest Investments to value assets held by the A-Cap insurers, the order states. Harvest reviewed three specific loans or loan packages to Flair Airlines, PAC Wagon/Phoenix Aviation, and JARM.

All were deemed by Harvest to be worth well less than the internal valuations assigned by the insurers. Relying on the Harvest valuations, Utah examiners adjusted the "capital and surplus" of the three insurers to:

Sentinel Security: from $130,478,003 to ($143,106,666)
Haymarket: from $63,471,407 to ($239,660,592)
Jazz Re: from $3,083,242 to ($138,740,748)

"With negative capital and surplus in the hundreds of millions of dollars, the Companies’ admitted assets are less than their liabilities; and the Companies are using funds from new premiums and/or liquidating investments other than the impaired investments to pay their obligations as they become due," the order says.

Small annuity player

During the third quarter, Sentinel Security had a market share of 0.39% in a $115 billion annuity market, according to Wink’s Sales & Market Report.

“This puts Sentinel Security Life in a precarious position," said Sheryl Moore, CEO of Wink, Inc. and Moore Market Intelligence. "I’m curious to see what is in store for their contract holders.”

The examination of the A-Cap insurers "is ongoing," Utah officials say.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.