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NEW YORK (
SAC Capital Advisors' foray into world of reinsurance may be under threat after the
Department of Justicelevied five criminal charges against the hedge fund last week.
SAC Capital, as an investment manager to reinsurer
S.A.C. Re, is responsible for making investments to cover an unknown amount of reinsurance the firm has underwritten. As
TheStreetfirst reported, the relationship could come back to bite the hedge fund, given its current state of distress.
Insurance rating firm
A.M. Best said Tuesday that criminal charges against SAC Capital put the hedge fund's role as investment manager for S.A.C. Re in question. The firm put S.A.C Re's strong (A-) insurance rating on review for a downgrade on Tuesday.
"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 firm said in a Tuesday news release.
"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."
When initially rating S.A.C. Re in July of 2012, A.M. Best highlighted a convergence of underwriting risk and investment risk in the hedge fund industry as the firm's most significant challenge. S.A.C. Re may now need to cut ties with SAC Capital if it hopes to maintain a strong insurance rating.
A.M. Best will finish its ratings review when S.A.C. Re updates its business model.
"Despite these recent events the risk-adjusted capitalization of SAC Re remains supportive of its current ratings," A.M. Best notes, while highlighting that retention of key management will be an important factor in its review.
The plight of SAC Capital could bring to light long-held concerns about a rush of hedge funds into Bermuda's reinsurance market.
In addition to S.A.C. Re, David Einhorn's
Greenlight Capital has controlled a reinsurance subsidiary called
Greenlight Re(GLRE - Get Report) since 2004. Daniel Loeb's
Third Point Capital filed a prospectus earlier in July for a $250 million initial public offering of its reinsurance subsidiary,
Third Point Reinsurance. John Paulson-run
Paulson & Co. controls
PaCRe alongside minority investor
Validus Holdings(VR), a reinsurer.
In 2012, SAC Capital and private equity firm
Capital Z Partners opened S.A.C. Re with $500 million of capital. The goal was to have S.A.C Re underwrite low-risk property and casualty reinsurance and have SAC Capital's hedge fund wizards profitably invest the reinsurance float.
So far, $500 million of S.A.C Re assets have been invested back in SAC Capital and it is unclear how much reinsurance the venture has underwritten.
Warren Buffett of insurance and investment conglomerate
Berkshire Hathaway sees hedge funds' entrance into the reinsurance industry as a perfectly legal way to defer taxes on their investment gains. However, Buffett
said at Berkshire's May 4 shareholder meeting that hedge funds have increased competition for premiums and made reinsurance pricing too low.
"Hedge funds have entered the reinsurance business quite aggressively in the last few years," Buffett said, adding that Berkshire Hathaway wasn't going to push heavily into certain reinsurance markets given prevailing prices.
SAC Capital's legal troubles, however, may uncover concerns about the sustainability of hedge funds using their flighty investment activity to support reinsurance policies.
A grand jury has indicted SAC Capital for one count of wire fraud and four counts of securities fraud, in an insider trading conspiracy U.S. prosecutors allege lasted over a decade and led to hundreds of million of dollars in illegal profits and avoided losses.
While the U.S. attorney also levied civil money laundering charges against the fund, Preet Bharara, U.S. Attorney for the Southern District of New York, said Thursday the government will be mindful of minimizing investor losses from its criminal action. Presumably, that applies to S.A.C. Re's investments currently invested managed by SAC Capital.
"[The] government's action today does not attempt to freeze any of SAC's assets. We have been advised by the U.S. Attorney's Office that their action is not intended to affect the ongoing operations of SAC's business, prevent investor redemptions, or impact the interests of any of SAC's counterparties," SAC said in an e-mailed statement Thursday.
SAC Capital said Thursday it objects to the government's criminal action. On Friday, it pleaded 'not guilty' to all five of the DoJ's criminal charges.
The fund also said last week it will fight an administrative action filed by the
Securities and Exchange Commission against Steven A. Cohen.
In a Tuesday e-mail, Simon Burton, chief executive of S.A.C. Re, declined to comment on how the government's charges against SAC Capital could impact its reinsurance operations.
-- Written by Antoine Gara in New YorkFollow @antoinegara