Moody's Investors Service has affirmed the Baa1 insurance financial strength rating of a Bermuda reinsurance subsidiary of Goldman Sachs.

The outlook for the medium-grade rating on the Bermuda company, Arrow Reinsurance Company Limited, is stable.

Arrow Re is a subsidiary through the Goldman Sachs non-US Americas Holdings LLC and ultimately The Goldman Sachs Group Inc.

The company functions as a vehicle for Goldman Sachs to offer its clients risk-transfer solutions in the form of reinsurance treaties.

The rating is based on the implicit and explicit support provided by its parent, a solid credit profile based on its very strong capitalisation relative to its current in-force exposures, offset by its lack of a stand-alone insurance franchise, limited diversification across product lines and counterparties, and uncertain profitability.

The primary purpose of Arrow Re is to afford Goldman Sachs the ability to offer its clients risk-transfer solutions, structured as reinsurance transactions, a legal form preferred by some clients for its regulatory capital, accounting and other benefits.

Moody’s said that at present Arrow Re's primary outstanding reinsurance exposures are to fixed index annuity and, to a declining degree, variable annuities.

The report said: “Arrow Re may retain some modest biometric insurance risks but typically seeks to achieve a risk-neutral position by hedging the various components of market risk it assumes through transactions, such that its exposure is limited to basis and counterparty risk on the intragroup hedges it has in place.

“Arrow Re's risk management and limited risk exposures relative to shareholders' equity is a key strength and supports the company's stand-alone credit profile.

“Arrow Re's operations are tightly interwoven with that of its parent, and its clients are counterparties of Goldman Sachs, which Moody's believes, from a reputational perspective, incentivises Goldman Sachs to provide support to Arrow Re to the extent that it has outstanding exposures.

“Arrow Re also benefits from a keep-well agreement from Goldman Sachs. While this is a form of explicit support, Moody's does not consider a KWA to provide the same degree of support as a guaranty.

“Arrow Re does not benefit from the Goldman Sachs brand name and is a relatively small operation within the context of the wider group. Moreover, since the KWA is a contingent liability, with limited scope, in Moody's view, is unlikely to survive a failure and resolution of the parent.

“Moody's therefore does not consider Arrow Re's contingent claim under the KWA to rank pari passu with senior debt in all situations. In addition, in the event of a failure of Goldman Sachs, it is unclear whether its regulators would elect to preserve its obligations to Arrow Re.

“Given the contingent and limited nature of the KWA, the rating agency believes that Arrow Re would benefit from a moderate probability of support from its ultimate parent, resulting in a one notch uplift to its stand-alone profile is.

“The stable outlook on the rating reflects the stable outlook on the Goldman Sachs' operating entities and Moody's expectation that Arrow Re will remain well capitalised relative to its exposures.”