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Best’s News & Research Service - August 27, 2014 02:47 PM (EDT)

Best's Briefing: Focus Remains on Credit Fundamentals in Rating Hedge Fund (Re)insurers

Oldwick //BestWire// - With hedge fund capital continuing to flow into the property/casualty (re)insurance space, A.M. Best has released a briefing exploring the rating analysis on hedge fund (re)insurers.

These entities differ from a traditional reinsurance company, primarily due to the investment strategy pursued, and how that strategy matches the underwriting strategy. Many insurers' and reinsurers' investments are held and managed outside of the company; the level of volatility often associated with a hedge fund and its investments is not typical of that related to the insurance industry.

The Best's Briefing, titled "Focus Remains on Credit Fundamentals in Rating Hedge Fund (Re)insurers," states that accordingly, A.M. Best's rating process for these hedge fund (re)insurers remains in accordance with Best's Credit Rating Methodology (BCRM), whereby an in-depth analysis is performed on the company's balance sheet strength, business profile and (projected) operating performance. For hedge fund (re)insurers without a demonstrated track record of operating performance, the analytical focus is anchored by extensive due diligence on management expertise/track record, asset management capabilities, business plans, internal operational controls and overall enterprise risk management (ERM) program.

A.M. Best maintains an interactive rating with five hedge fund (re)insurers in what is still a nascent reinsurance market segment. A.M. Best does not specifically view this structure as a new business model, and therefore, analyzes these entities under its existing criteria reports. A.M. Best believes this structure does not present a long-term replacement for traditional participants, nor does it eliminate current or future capital market solutions. These vehicles serve as more of a niche strategy that, when executed properly, should be able to succeed in its focused approach, albeit with potential increased volatility.

To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=228164 .

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.



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