Hedge fund backed annuity & life insurer Knighthead gets rated

A new hedge fund backed annuity and life insurance company has received its rating, showing that the trend towards leveraging hedge fund strategies to boost insurance or reinsurance company performance is expanding.

Typically hedge fund strategy reinsurance firms are the subject that generates most interest in this area, as property and casualty companies have been formed with the backing of existing hedge fund managers, in a strategy that looks to outperform the traditional market.

By adding a higher performance investment strategy to a reinsurance underwriting business, the idea is that the hedge fund manager can invest the premium float to add income which boosts the overall profitability.

Knighthead Annuity & Life Assurance Company, domiciled in the Cayman Islands and capitalised to the tune of over $220m with equity, is a little different. The firm aims to provide annuity products to high-net-worth clients to help them to “preserve and grow accumulated wealth.”

These big-ticket life annuities will provide significant amounts of float over long durations, providing the underlying hedge fund manager Knighthead Capital Management, LLC with the potential to access large sums of more-permanent capital.

Rating agency A.M. Best said that it assigned a financial strength rating of B++ (Good) and an issuer credit rating of “bbb+” to Knighthead Annuity & Life Assurance Company.

A.M. Best explained; “The ratings reflect Knighthead’s anticipated opportunity in the offshore traditional fixed-annuity market, good initial risk-adjusted capitalization, favorable projected operating performance and an experienced management team. Knighthead has recently commenced marketing traditional fixed annuities to high net worth non-U.S. individuals and has recently signed its first distribution agreement with a major broker dealer.”

Knighthead is forecasting strong demand for its annuity product, with the higher than typical returns generated by the asset manager Knighthead Capital Management seeking to make its products more attractive than comparable annuities providers.

A.M. Best notes that there is “higher potential for volatility in returns and risk-adjusted capitalization” due to the interest rate sensitive nature of the product and the “atypical investment strategy.”

The company will also be exposed to asset and liability duration mismatches, A.M. Best notes. However, the long duration of an annuities product could mean that the investment duration that Knighthead has the float available to it is a significant term.

Knighthead Capital Management does not have a particularly long track-record either, A.M. Best said, noting that the hedge fund manager has favorable volatility in relation to peers and benchmarks but a relatively short history for comparison, having launched in 2008.

Knighthead is an interesting twist on the hedge fund reinsurance strategy, with it being the first annuity company with hedge fund backing that has been seen in recent years. Other annuities providers have often been backed by much larger, more traditional asset managers in the past, but Knighthead follows an event-driven, distressed credit and special situation investment strategy, which is much more unusual in the space.

The allure of insurance premium float remains strong and asset or hedge fund managers will find new ways to access the more permanent capital it can provide.

A.M. Best noted that any under-performance of the Knighthead investment strategy which caused a drop in operating performance or a decline in risk-adjusted capital could result in a ratings downgrade on the insurer.

A number of hedge fund backed reinsurance start-ups have reportedly failed to get rated in recent months. Perhaps the fact that annuities products and business plans have always incorporated an investment strategy has helped Knighthead to push its rating through more easily.