Insurers, AM Best trade accusations in lawsuit over ratings downgrade

Update: Late Tuesday, Judge Rukhsana L. Singh ordered AM Best to deliver the disputed documents to him by Thursday. Singh will review the documents sought by plaintiffs, his ruling states.

A pair of life insurers suing AM Best over a potential ratings downgrade say the defendant is refusing to share emails related to the controversial move. AM Best countered by claiming it's the insurers who are refusing to comply with discovery.

Atlantic Coast Life Insurance and Sentinel Security Life Insurance are trying to prevent AM Best from downgrading their financial strength ratings, which could potentially drop from B++ to B-. The lawsuit was filed last month in the District of New Jersey federal court.

The insurers are part of the A-Cap insurance group, which sits at the center of a swirling, and mysterious, financial controversy involving the investment firm 777 Partners.

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.”

In February, AM Best downgraded the long-term issuer credit rating to from bbb+ to bbb for both Atlantic Coast and Sentinel Security. The private equity interest in life insurance assets has drawn criticism from several directions.

The downgrade “is based on A-CAP Group’s risk management of reinsurance counterparties and its reliance on those counterparties,” AM Best said in a news release. “The underlying collateral is under review, as well as the financial wherewithal of its unaffiliated reinsurers over the near term. The company is also placing new business in unrated counterparties even as its weight of counterparty risk from unrated reinsurers increases.”

Downgraded three notches

By late April, AM Best was concerned enough to settle on another downgrade to Atlantic Coast and Sentinel Security, which would have taken their financial strength rating down three notches, from B++ to B-.

The insurers are asking the court to force AM Best to recalculate the rating, accusing the defendants of having a “fixation” with 777 Partners. The plaintiffs ask the court for a temporary restraining order and a preliminary injunction.

“The very existence of Plaintiffs’ business hangs in the balance,” wrote Liza M. Walsh, attorney for the insurers in an April 24 letter to the court.

With the sensitive nature of the respective businesses, many court documents are redacted and plaintiffs filed a motion to seal some information, which a judge has granted. Still, AM Best is claiming “improper privilege” with some of its email correspondence, Walsh wrote in another letter.

Plaintiffs are looking for emails between March 28 and the decision to downgrade the insurers’ financial strength ratings on April 22, Walsh writes.

“Defendant has produced only 120 internal emails after March 28, and no emails copying counsel,” the letter reads. “The post-March 28 emails that Defendant has produced contain little substantive discussion of the credit rating action. Moreover, Defendant’s privilege log indicates that it has withheld or redacted 27 emails solely between non-lawyers sent after March 28.”

Walsh asked the judge to compel defendants to produce documentation. Depositions could begin soon, she noted, and a hearing on the preliminary injunction request is set for June 28.

“Plaintiffs do not have the luxury of further delay,” Walsh wrote.

No agreement on search terms

For its part, AM Best attorneys say the plaintiffs have failed to provide the information on its assets that would help determine whether AM Best's rating action is justified. The insurers and AM Best have not been able to agree on search terms that would set the parameters for a document search.

"One of Plaintiffs’ chief complaints in this action is that AM Best undervalued these assets in assessing their Financial Strength Ratings," AM Best attorneys wrote in a Monday letter to the court. "Since then, public reporting indicates that the assets are under great stress, which would tend to show that AM Best was correct in its assessment of these assets."

Like the plaintiffs, AM Best notes the June 28 hearing date and urged the judge to rule "as expeditiously as possible."

InsuranceNewsNet Senior Editor John Hilton 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.

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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.