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Bermuda 'Class of 2005' awarded secure ratings


Any concerns over the swiftness of ratings being assigned to the so-called "Class of 2005" Bermuda startups are largely unwarranted, rating agencies and reinsurance intermediaries say.

Confidence can be drawn from the stringent capital requirements and detailed business plans that the rating agencies are demanding from new companies, they say, coupled with the knowledge that most startups are focused on underwriting short-tail lines.

Record hurricane losses in 2005 prompted investors—who anticipate a favorable market environment—to devote billions of dollars in recent months to reinsurance ventures in Bermuda. Within a matter of weeks of opening their doors, a number of these firms obtained ratings (see box).

Oldwick, N.J.-based A.M. Best Co. was the first to assign a rating for a member of the Class of 2005, with its A- rating for the newly created catastrophe reinsurer Amlin Bermuda Ltd., a unit of London-based Amlin P.L.C. It has also issued the most startup ratings of any agency—for eight of the 11 new Class 4 companies the Bermuda Monetary Authority approved since late October. Class 4 commercial insurers and reinsurers are required by the BMA to have a minimum of $100 million in capital and surplus.

Representatives from Best did not return calls seeking comment on their rating methodology, but the agency has defended the practice of rating startup companies.

"A.M. Best believes the practice of rating startups is a positive contribution to the overall health of the insurance industry as new companies are required to maintain conservative capitalization during the startup phase—generally considered to be at least five years—and demonstrate the expertise of its management and operating personnel, as well as the development of infrastructure or infrastructure operations in order to obtain a Best's rating," Best said in a statement last month.

Other rating agencies have also said they will issue ratings for the new Bermuda reinsurers.

"We do rate startup reinsurance companies," confirmed Mark Rouck, analyst at Chicago-based Fitch Ratings. "We don't have a set policy that prohibits us from doing that."

As part of its minimum requirements, Fitch requires from startups a detailed business plan, a description of the products the company will underwrite and a pricing strategy and marketing and distribution plan for the products, Mr. Rouck explained.

"If there is a parent company involved, you want to examine (the startup's) relationship with the new company," he added.

Still, Class of 2005 reinsurers will likely have a tough time securing the highest ratings from Fitch. "While Fitch's rating methodology does not impose a ceiling on startup reinsurer's ratings," the agency said in a statement, it will be "difficult for the majority of the Class of 2005 to achieve insurer financial strength ratings as high as the 'A' range," though it noted that startup status likely would not preclude "secure" ratings in the BBB range.

Unlike market conditions when the last wave of startups formed in Bermuda—following the Sept. 11, 2001 terrorist attacks, which resulted in premium rate hikes across a range of business lines—rate increases this time around could be narrow and short lived, Fitch predicted.

An even greater concern lies in the availability of management talent, according to Fitch, because a relatively small talent pool exists to staff the multitude of companies that simultaneously set up in Bermuda.

Many Class of 2005 startups, though, have attracted expertise from established firms.

Bermuda-based Validus Reinsurance Ltd.—backed by an insurance investment vehicle headed by former Marsh & McLennan Cos. Inc. Chairman and Chief Executive Officer Jeffrey Greenberg—has taken on as its chairman and CEO Edward J. Noonan, former president and CEO of American Re Corp.

Lancashire Insurance Co. Ltd., a new insurer and reinsurer created to write aviation, marine and energy, and property catastrophe risks, will be run by CEO Richard Brindle, formerly an underwriter at Charman Underwriting Agencies Ltd. and a director of Ascot Underwriting Ltd., both in London.

Management track records represent a key factor in the ratings for new Bermuda startups, rating agencies say, but not all firms have been providing adequate information.

"We have companies that haven't even hired a chief executive that are asking us to rate them," said Mark Puccia, managing director at Standard & Poor's Corp. in New York. "I just don't see how you can assign an A- to that situation," he said.

"We are concerned that some companies are getting A- ratings because they need one," Mr. Puccia noted. While S&P does assign ratings to startup companies—and has done so for nearly a decade—"what we do not do is assign ratings to facilitate a company's ability to do business," he said.

"There are certainly a number of startups we believe we can rate," Mr. Puccia said of the new crop of Bermuda companies. "I think we can and will see some 'A-'s, but we do not expect to see a lot of 'A-'s."

So far, S&P has assigned ratings to two companies from the new batch: an A rating to Amlin Bermuda; and an A- to Hiscox Insurance Co. (Bermuda) Ltd., an arm of London-based Hiscox P.L.C. that will underwrite both reinsurance and retail insurance business.

But, according to Steve Dreyer, managing director at S&P in New York, these ratings are "not necessarily indicative of the ratings we would expect to be assigning too many of the 'true' startups," he said, referring to companies that are starting with fresh capital, new investors and new management teams.

Despite being seemingly early, intermediaries expressed confidence in Class of 2005 ratings and indicated they provide clients with a stronger sense of security than no company rating at all.

"The general concept of giving an immediate rating is something that I think is positive," said Steve Bolland, president of intermediary Gill & Roeser Inc. in New York.

Mr. Bolland recalled a time when A.M. Best, for example, assigned all startups an "NA3"—or "not assigned"—rating based upon insufficient operating experience, noting that such a practice "was unfair, because they could hide behind the rating."

And because most companies will be writing short-tail lines, intermediaries say, the ratings for the latest crop of Bermuda startup reinsurers are justified, provided they possess sufficient capital.

"These are catastrophe reinsurers, in the main," Mr. Bolland said. "We're not talking about people who are writing long-term liability risks, and the fact that it's short-tail business makes it more secure."

"Certainly, in the first year of operations, a billion dollars covers up a lot of mistakes," acknowledged Tim R. Gardner, managing director and leader of the global property specialty practice for Guy Carpenter & Co. Inc. in New York. "While that's not necessarily a great long-term strategy," Mr. Gardner said, it does give the new Bermuda companies some time to work out any kinks.

According to Mr. Gardner, the process of conducting individual security assessments is tough, and not necessarily a practical undertaking. "We just don't get enough access to information" and the same types of financial and company data as the rating agencies do, he said.

"Generally, we are comfortable that the rating agencies, in total, are the keepers of financial strength," Mr. Gardner said. "We tend to live by those assessments."

"We tend to rely on the ratings from the rating agencies quite heavily," concurred Mr. Bolland. "As an intermediary, it's very difficult to find the time to analyze the underlying asset."