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‘Class of 2005’ is not A strength – comments Fitch

Ratings agency Fitch has cast doubt over rival AM Best’s ratings of the ‘Class of 2005’ reinsurance start-ups and questioned the long-term viability of the new businesses.

Fitch said: “While Fitch's rating methodology does not impose a ceiling on start-up reinsurers' ratings, the agency believes that the following factors would make it difficult for the majority of the Class of 2005 to achieve insurer financial strength (IFS) ratings as high as the A range but likely would not preclude 'secure' ratings in the BBB range.”

The agency cited doubts over rate increases, concentration of risk in volatile lines, opportunistic investors and lack of underwriting talent as factors that may all hamper the progress of the new firms.

Fitch believes that rate increases will be confined to a narrow group of business lines and could well be short-term. It said: “Premium rates are unlikely to experience significant and sustained increases across a broad spectrum of business lines in response to 2005’s hurricane related losses. While the agency expects significant rate increases on property exposures in hurricane-prone areas, it believes that premium rates on property exposed business outside of these geographic areas, and premium rates on casualty-related business, are unlikely to increase materially.

“Fitch believes that ‘Class of 2005’ is likely to be narrowly-focused on property catastrophe related business lines. Fitch views this as a natural situation given the events that have lead to the Class’s formation (i.e. very large property/catastrophe related losses) and corresponding lack of broad-based rate increases across other business lines. However, Fitch also views this as a risk concentration that has negative implications from a rating perspective,” the agency warned.

And Fitch had further warnings concerning the source of capital that is underpinning the new generation of start-ups, commenting: “The proportionately large amount of capital contributed by hedge funds and private equity investors to the ‘Class of 2005’ has negative rating implications. Fitch views hedge funds and private equity firms as opportunistic, shorter-term investors. Thus, long-term ownership remains a significant uncertainty with respect the ‘Class of 2005’.”

And over concerns that firms may lack the necessary talent and experience to succeed Fitch said: “Underwriting talent is generally present among these reinsurers, at least in limited scope, and that without a proven level of underwriting expertise the reinsurers would not have been able to raise their substantial amounts of capital. The flip side of this is that this underwriting talent may be very concentrated and as a result, generate a significant amount of key-man risk.”

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