Even as new waves of hedge fund reinsurers launch, one rating agency continues to question the basic business model—a model that also has critics among U.S. lawmakers who have tried unsuccessfully to remove perceived tax breaks for HFRs.

Executive Summary

Over the past three years (2013-2015), hedge fund reinsurers have pursued aggressive top-line growth while turning in no underwriting profit, and alternative investments have yet to deliver the promised returns for the group, S&P said in a recent report. In addition to financial highlights presented by S&P, this article summarizes the thoughts of two HFR CEOs about dealing with volatile investment markets and the prospect of changing U.S. tax laws.

The title of a recent report from Standard & Poor’s Global Ratings—”Hedge Fund Reinsurers: Dead or Alive”—gives an idea of S&P’s assessment. “The HFR model will continue to evolve and nibble at the edges of the reinsurance market as it carves out a niche for itself, competing primarily with small reinsurers while leaving some HFRs’ carcasses on the side of the road,” concluded the report, published in early July.

For the last few years, S&P analysts have voiced concerns over a strategy that has a high risk tolerance on the investment side—with investment schemes potentially determining what happens on the underwriting side of the house rather than the other way around while also consuming more capital and increasing the volatility of earnings over time.

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