First insurance-linked fund rating criteria finalised by A.M. Best

The first rating criteria has been published that specifically targets insurance-linked funds, including those investing in catastrophe bonds, ILS and collateralized reinsurance, by rating agency A.M. Best.

It’s the first time that a rating agency has proposed applying a rating methodology to insurance-linked security (ILS), catastrophe bond and reinsurance linked investment funds.

A.M. Best explains that an Insurance-Linked Fund Rating (ILFR) is the rating agencies opinion on an insurance-linked fund’s (ILF) average credit quality and the fund’s vulnerability to losses due to:

1. Credit defaults in a portfolio constituted primarily of insurance-linked assets.
2. The inability of the fund to fulfill specific and direct contract obligations associated with insurance-linked assets if such obligations exist.

ILS ratings will be available for investment fund’s allocating capital to assets, obligations and instruments such as:

Natural catastrophe bonds, industry loss warranties, extreme mortality bonds, surplus notes, trust-preferred securities, structured settlements (of both the period-certain and life-contingent varieties), ordinary annuities, life settlements, Regulation XXX/AXXX securities, collateralized debt obligations backed by insurance-related risks and other insurance-linked assets, obligations and structured securities.

The ratings are considered to be fundamentally different to issue or issuer credit ratings as funds typically cannot default on obligations, due to the fact that their investors participate in the fund’s fortunes, either losses or gains. A.M. Best notes that the IFLR does not guarantee the performance that investors in a fund should expect and does not make any statement regarding the net asset value that investors should expect or the fund manager’s fees.

The rating criteria was first revealed at the end of September and was subject to a thirty day comment period. Now, with any comments taken into consideration, A.M. Best has published the completed insurance-linked funds rating criteria.

So far no insurance-linked funds have been rated, so it will be interesting to see whether any existing ILS managers seek to obtain a rating for their ILS funds, or whether A.M. Best proactively rates some of the main funds to provide an example of their new methodology in use.

Investors typically won’t be used to alternative investment funds having a rating, so it is unlikely to be a pre-requisites for many third-party investors who are interested in the ILS space. However, if a number of funds do get rated it will begin to provide a useful benchmark for investors who are looking at the space, hence it may be beneficial for ILS managers to explore the rating criteria and to consider getting their fund’s rated.

You can access a copy of the full Insurance-linked Fund Ratings criteria report from A.M. Best here.