SAC Capital's Reinsurance Venture Faces New Scrutiny

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NEW YORK ( TheStreet) -- SAC Capital Advisors' foray into world of reinsurance may be under threat after the Department of Justice levied 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 TheStreet first 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 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 , 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.