A.M. Best Comments on: Rating the Class of 2005 Bermuda Start-Ups.

OLDWICK, N.J. -- A.M. Best Co. has begun issuing indicative ratings and assigning public ratings to the Bermuda Start-Up Class of 2005 as they have come to be known.

A.M. Best believes the practice of rating start-ups is a positive contribution to the overall health of the insurance industry, as new companies are required to maintain conservative capitalization during the start-up 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 support for operations in order to obtain a Best's Rating. In addition, the review of aggregate exposures to catastrophe losses and the analysis of actual results compared to plan engage companies in the issues long before they manifest themselves in balance sheet problems.

For A.M. Best to proceed with an initial rating assignment, certain conditions must be fulfilled:

--Initial financing must be completed prior to or concurrent with the initial rating assignment.

--Capitalization that conservatively supports the assigned rating throughout the business plan with stress-tests for profitability and shock losses must be included in the initial financing.

--Management must demonstrate a successful track record of operating performance relevant to the new venture's core business. Experience with organizing new insurance ventures also is factored into the process. If operating performance at management's prior employer was weak during their tenure, the projected earnings for the new venture will be reduced to reflect the potential that things might not go as planned.

--A clearly defined, five-year business plan must be finalized, including support of all principals and evidence that management is well qualified and capable of implementing the plan.

--Experienced management and the appropriate staff and operational infrastructure must be in place, or adequately provided by third parties, to support initial activities and meet regulatory and rating agency scrutiny.

--Management, board members, strategic investors, investment bankers, actuaries and other advisers must be available for discussions with A.M. Best and to provide comprehensive disclosure of requested information.

--A follow-up process must be in place to measure the effectiveness of the initial business plan and to monitor the company's strategic and financial development.

While A.M. Best's general approach to rating new company formations remains the same, this class of new (re)insurers finds themselves in a very different situation than did those that began business in 2001-2002. Prior to the 2005 hurricane season, the general property and casualty insurance market had entered the softening phase of the cycle. Today, property rates--and in particular rates for catastrophe exposed properties and offshore marine and energy risk--are hardening, while casualty rates continue their downward trend. Consequently, the market opportunity is narrower and most anticipate its duration will be very limited.

In addition, the number of start-ups over the past several years has depleted the talent pool of senior executives with successful experience heading organizations, let alone newly formed companies. While some individuals have emerged with strong reputations, the first few years will test their mettle.

Perhaps for these reasons, today's start-up class has developed its business plans in search of capital, while the Class of 2001 generally came to the table with sponsors who took majority stakes in their ownership.

In light of these issues, A.M. Best has identified four major areas of its start-up analysis that are crucial to the achievement of a secure financial strength rating. A- (Excellent) designation.

First, infrastructure must be in place or adequately provided by third parties in the early stages. Systems and operational controls relating to underwriting, risk management, claims, investments and financial reporting must be completely documented and deployable on the first day of operation. The Class of 20005 will benefit from the preponderance of startups over the past few years, as service firms have developed and been tested in the interim.

Secondly, a reasonable and achievable business plan that is prepared by the senior management team must be presented to A.M. Best to demonstrate management's impression of the current market opportunity, and its strategy for managing market cycles. Loss and expense ratios must be rational relative to historical market trends.

PML assumptions must be consistent with zonal aggregate limits and risk profile of lines of business to be written, and growth assumptions must reflect realistic assumptions for the market trend. The business plan must clearly delineate management's overall risk appetite and demonstrate management's proficiency for analyzing, measuring and containing peak exposures. Moreover, the plan must demonstrate adequate liquidity for meeting cash needed under stressed scenarios. Detailed assumptions must be available.

Third, key management positions must be filled or candidates identified with a reasonable assurance that the position will be filled in the short term by a qualified individual. These business practice leaders must be available to meet with A.M. Best with plans demonstrating how they will achieve the goals set forth by their investors and meet the targets set forth in the financial projections.

Fourth, financial flexibility is critical, as the risk of adversity is much greater in the start up phase of any business, especially those subject to catastrophe losses, uncertain loss costs, and often fiercely competitive market conditions.

For more information on A.M. Best's methodology for rating new companies, please access the full methodology report at www.ambest.com/ratings/methodology.asp.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.