PaCRe ratings withdrawn by A.M. Best, on request from company

Insurance and reinsurance rating agency A.M. Best has withdrawn the ratings on the John Paulson and Validus backed joint venture investment-oriented (or hedge fund strategy) reinsurer PacRe Ltd., at the companies request.

Back in January, A.M. Best has placed hedge fund strategy reinsurance firm PaCRe Ltd’s rating under review with negative implications. The rating agency blamed a shortfall in performance, compared to the reinsurers business plan, caused by poor investment returns at the hedge fund.

That performance issue has persisted, with PaCRe’s results contribution to Validus suffering from a number of quarters of lower investment return at the John Paulson hedge fund.

PaCRe has been beset by poor investment returns a few times since its launch in 2012, with investment losses at the Paulson hedge fund impacting the results contribution from the joint-venture reinsurer.

It’s not been an easy time for these hedge fund style reinsurance vehicles though, with a number of years of volatility, global economic uncertainty and depressed investment yields impacting the asset side of many of these ventures.

Now, A.M. Best says that it has affirmed PaCRe’s financial strength rating of A- (Excellent) and issuer credit rating of “a-”. At the same time the ratings have been removed from under review with negative implications and assigned a negative outlook.

Concurrently, A.M. Best has withdrawn PaCRe’s ratings in response to a request from the company to no longer participate in A.M. Best’s rating process.

A.M. Best explains:

The negative outlook reflects PaCRe’s focused business profile in what has become a competitive property catastrophe reinsurance market and the overall performance of its alternative asset strategy relative to its original projected business plan. The company has not achieved its projected premium volume, due to the current competitive market environment in property catastrophe reinsurance. However, it has produced positive underwriting results since inception, despite a few significant loss events, which is a testament to the solid underwriting and strong cycle management capabilities of the underwriting manager.

Additionally, the alternative asset strategy has not performed as expected during PaCRe’s operating history producing unrealized investment losses. Although management has made changes to the investment strategy in an effort to reduce the volatility, it will take time for these changes to inure to the benefit of PaCRe.

However the rating agency does not give any explanation for why the company may have requested to have its ratings withdrawn.

It’s possible that PaCRe will aim to carry on as an unrated reinsurance vehicle, underwriting alongside the Validus Group. This is likely a viable route for the reinsurer, to become a kind of companion vehicle underwriting peak property catastrophe risks with the Paulson investment strategy on the back-end, but without the oversight of a rating agency.

It’s also possible that the joint-venture reinsurer could be looking to wind-down, that has to be considered, as a response to the U.S. Treasury’s targeting of hedge fund backed reinsurers.

At this time it’s not possible to say what plans Paulson and Validus may have for PaCRe in the future, but we’ll update you if any more information becomes available.

A.M Best also said:

PaCRe’s business plan will be challenged by established reinsurers as well as other alternative investment reinsurers entering the market, and more property catastrophe capacity into an already overcapitalized reinsurance marketplace could pressure underwriting margins.

That perhaps, combined with the challenging investment environment, provides more of an explanation as to the rating withdrawal.

Conditions are difficult on both sides of the PaCRe investment-oriented reinsurance business model, and unlikely to get easier quickly, so perhaps removing the rating oversight will reduce some pressure for this reinsurance joint-venture while it works out its next steps.