AM Best has placed the financial strength rating of A- (Excellent) and the issuer credit rating of "a-" of Bermuda-based PaCRe under review with negative implications.
PaCRe was created in April 2012 when parent company and re/insurer Validus announced that it was investing $500m into it. PaCRe's business plan is to combine the returns available from underwriting top layer reinsurance programmes with a long-term approach to asset management, with an investment portfolio managed by hedge fund firm Paulson & Company.
According to AM Best: "The under review status is a result of the shortfall in PaCRe's overall performance relative to its original projected business plan, resulting from significant unrealised investment losses since inception relating to its alternative asset strategy. Although, the company has not achieved its projected premium volume, which is primarily due to the current competitive market conditions in property catastrophe reinsurance, it has produced positive underwriting results year over year, which is evidence of the solid underwriting and strong cycle management capabilities of the underwriting manager.
"The ratings will remain under review pending further discussions with management concerning the shortfalls in performance and what, if any, actions might be taken, as it regards underwriting and investment strategies going forward."
Hedge fund reinsurers realistically require at least an A- rating in order to do business, so any downgrade would have serious consequences (see IAR, 6 January, Asset risks hold back held fund insurers).
Two days ago Bloomberg reported that Paulson & Company, which at its peak in 2011 had $38bn in assets, has less than half that amount now because of investor withdrawals and losses.