SAC Re, the Bermuda based Class 4 reinsurance company backed by Steven A. Cohen, billionaire hedge fund manager and founder of the beleaguered hedge fund SAC Capital Advisors LP, has officially had its financial strength and issuer credit ratings placed under review with negative implications by A.M. Best.
With SAC Re’s parent, the hedge fund SAC Capital, facing criminal charges from the U.S. government for insider trading, the market has been waiting to see what the fall-out for the reinsurer may be. SAC Re follows a typical hedge fund backed reinsurer strategy, of handing its premium income to SAC Capital which acts as an investment manager for substantially all of the reinsurers assets.
This strategy gives SAC Capital a source of long-term capital from the reinsurance market, which it can invest within its hedge fund, while for SAC Re the target is to outperform its peers through underwriting low volatility risks but with a higher return for the asset management strategy.
The ratings review from A.M. Best is purely linked to the fall-out from the criminal charges that SAC Capital is facing. The rating agency said; “The rating actions reflect A.M. Best’s concern with the business plan originally presented by SAC Re, which took into account invested assets being managed by S.A.C. Capital.”
The concern now lies in whether SAC Capital will be able to continue as the investment manager for the reinsurer and whether SAC Re will have to rethink its business plan.
A.M. Best continued; “Given the current circumstances surrounding the investment manager, the original business plan may be challenged. Presently, there is uncertainty as to whether the invested assets can be managed by S.A.C. Capital as well as whether there will be ramifications concerning any affiliation with S.A.C. Capital on the reinsurance franchise going forward.”
A.M. Best explains that reputational risk through the use of the name SAC is also an issue for the reinsurer. “This reputational risk is due to both the reinsurer and the investment manager sharing the same name, as SAC Re is not a “subsidiary” or a “unit” of S.A.C. Capital, and S.A.C. Capital only serves as the investment manager. Despite these recent events the risk-adjusted capitalization of SAC Re remains supportive of its current ratings.”
A.M. Best said that it expects to conclude this ratings review once it has seen an updated business plan from SAC Re, including an updated investment plan that may, or may not, include SAC Capital anymore as the investment manager. Retaining key management at the reinsurer will also be a key factor in whether SAC Re maintains its ratings.
If SAC Re cannot separate itself from the reputational risk associated with SAC Capital’s criminal charges, the business plan is not executed or key personnel leave then ratings downgrades could be the next step.
SAC Re was originally launched with the backing of private equity company Capital Z Partners, who with SAC Capital, capitalised the reinsurer with $500m. SAC Re’s plan was to write low-volatility property and casualty reinsurance and boost its profits with the investment of the reinsurance premiums (float) at the hedge fund.
As we’ve written before, this hedge fund backed reinsurer strategy is also risky as investment losses at hedge funds show a correlation risk between underwriting and investment, something that a typical reinsurers investment strategy, which is much more conservative, is usually not affected by.
So we could see, as we wrote the other day here, SAC Re spun off into a separate reinsurance entity with more separation between itself and the Steven Cohen owned hedge fund. We could even see SAC Re change its strategy and business plan to move away from the investment float plan and adopt a more conservative investment policy. We could even see the reinsurer fold completely if it’s no longer able to serve the purpose it was designed for, of providing investment float to SAC Capital.
A.M. Best placed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of S.A.C. Re, Ltd. (SAC Re) under review with negative implications.
We’ll have to wait and see as the story unfolds around SAC Capital, the charges from the SEC and A.M. Best’s review of the reinsurer SAC Re. We’ll update you as more details come to light.