Insurers run by Advantage Capital Holdings are facing an emergency takeover attempt by the South Carolina insurance regulator for allegedly exposing policyholders to outsize high-risk investments.

South Carolina's insurance regulator filed a petition Tuesday to place Atlantic Coast Life Insurance Company and Southern Atlantic Re into rehabilitation, a court-supervised process similar to chapter 11 bankruptcy.

The petition alleges the insurers exposed policyholders to non-investment-grade private credit and investments tied to collapsed investment firm 777 Partners that could be worth "substantially" less than forecast.

Oaktree Capital Management, which agreed in March to purchase a controlling stake in Atlantic Coast Life, declined to comment.

South Carolina Department of Insurance Director Michael Wise previously attempted to halt the insurers from issuing new policies in the state over concerns about illiquid assets and 777 Partners exposure. A state judge later reversed that decision, ruling that the regulator lacked evidence to show the insurers were in financial distress.

A spokesperson for Atlantic Coast Life and Southern Atlantic Re said Wednesday that these claims put policyholders at risk and create fear in the market, adding that the companies intend to fight the petition.

"We fought these claims before and will fight them again," the spokesperson said.

Since that ruling, 777 Partners has filed for chapter 11, and its co-founder Josh Wander was indicted on federal fraud charges.

According to the regulator's petition, A-CAP allegedly told South Carolina's regulator that it had eliminated Atlantic Coast and Southern Atlantic's exposure to 777 Partners. But bankruptcy filings showed that the insurers continue to have exposure to the firm, according to the regulator.

The regulator also alleged that the insurers increased their exposure to non-investment-grade private credit bonds and unrated collateral loans in recent years, exceeding their policy limits on exposure to these assets. The regulator added that the insurers incorrectly reported this exposure as cash and investible assets.

The petition also raised concerns over exposure to distressed assets, including a bankrupt film industry insurer and a struggling low-cost Canadian airline. There is "substantial evidence" that the insurers' cash flows won't meet their coming obligations, the regulator said.

Under U.S. law, insurers aren't eligible for federal bankruptcy protection and instead restructure through state-level insolvency proceedings.