Fitch has cast doubt on the ease with which the majority of the start-up reinsurers, commonly referred to as the Class of 2005, could achieve insurer financial strength (IFS) ratings as high as the 'A' range.
The ratings agency said the high rating would prove difficult but would not preclude 'secure' ratings in the 'BBB' range.
Fitch said that reasons for this assertion included its belief that premium ratings were unlikely to experience significant and sustained increases across a broad spectrum of business lines in response to 2005's hurricane-related losses.
It also said that significant uncertainties existed as to how long hard market conditions might last in the noted property lines that are expected to harden.
Fitch also said that it believed that the Class of 2005 is likely to be narrowly focused on property/catastrophe related business lines, which it views as a risk concentration with negative implications from a rating perspective.
The ratings agency also cited potential problems obtaining management talent, particularly in light of the comparatively large number of companies being formed in such a short period of time.
Fitch said its primary concern was whether management talent had the depth of experience required to adapt to changing market conditions or to reposition the company, since history suggested that relatively few start-ups exist in their original form three to five years after incorporation.
The agency's concerns also included management's operational capabilities, since it said start-up reinsurers were often dominated by entrepreneurial underwriters who sometimes lacked a strong operational focus. Such risks become especially pronounced when market conditions inevitably start to soften, it said.
Fitch said it believed that underwriting talent was generally present among these reinsurers, but that talent may be very concentrated and as a result, generate a significant amount of key-man risk.
