Fitch Affirms Arrow Re’s ‘A+’ Rating

June 7, 2004

Fitch Ratings announced that it has affirmed Arrow Reinsurance Company, Limited’s ‘A+’ insurer financial strength rating with a stable outlook.

“Fitch’s rating is derived primarily from the existence of keep-well agreement between Arrow Re and its parent company, The Goldman Sachs Group, Inc.,” said the bulletin. It added that Fitch’s long-term issuer rating on Goldman Sachs is ‘AA-‘.

“Terms of the keep-well agreement require Goldman Sachs to maintain Arrow Re’s net worth at $1 million. Goldman Sachs’ potential obligation under the keep-well is capped at an amount that exceeds Arrow Re’s near-term risk exposures by a significant margin,” said Fitch. The rating agency believes “that this keep-well agreement provides Arrow Re with a significant amount of contingent-capital and that it offsets the company’s modest stand-alone capitalization.

“Fitch’s rating also reflects its belief that Arrow Re is closely linked to Goldman Sachs from both a risk-management and a marketing perspective.”

As a partially offsetting factor Fitch noted the “relatively small size of Arrow Re’s chosen market niche that effectively limits the size and scope of the company’s operations. Arrow Re’s business model utilizes a ‘matched book’ strategy where it first accepts and then hedges different forms of risks via reinsurance contracts or swaps and securitizations, and earns a spread based on the risk it retains. Retained risks might include credit risk, basis risk or risks associated with differences in contract language.”

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