Ratings agency A.M. Best yesterday released a report on how it goes about rating new insurance companies ? including the host of post September 11 start-ups to set up in Bermuda in 200002.

It said that in recent years, regulatory and tax issues, as well as market dislocations, had contributed to the formation of new insurance and reinsurance companies, many of which are based in Bermuda.

As a result, growing numbers of brokers, agents, lenders, capital market participants and corporate clients are seeking financial information about these new entities and to meet this demand A.M. Best said it provides ratings on these new organisations.

It went on to explain how it rates a new company adding that the interactive rating process for insurance companies involves numerous quantitative and qualitative factors that are grouped into three categories: balance sheet strength, operating performance and business profile.

The analytical components of A.M. Best?s rating process for new insurers can be grouped into the two categories of balance sheet strength and business profile.

?Since new companies lack a measurable track record of operating performance, A.M. Best applies a stringent set of qualitative due-diligence standards to the initial rating,? it said.

?These are grouped into a third evaluative category of operational controls. In particular, initial and prospective risk-adjusted capital levels typically will need to be well above the assigned initial rating level throughout the development phase of the company, even after factoring in conservative earnings and investment returns.?

And it said that evaluation of key financial ratios was integrated with a qualitative evaluation of the company?s operating plans and philosophies to gain a comprehensive understanding of the company?s initial standing and its future prospects.

As with A.M. Best?s traditional financial strength rating process, start-up entities are viewed within the context of the particular country risks to which they are exposed.

?Under these circumstances, A.M. Best utilises its country risk methodology, whereby countries are classified into one of five tiers reflecting the various economic and political risks that can affect an insurer?s financial strength,? it said. ?A.M. Best?s rating system applies the same rigorous criteria to all insurers, new or established, offering a means of directly comparing insurers regardless of longevity or country of domicile.?

But it said because a new company rating opinion must consider a greater degree of uncertainty, A.M. Best is conservative in its initial rating assignment.

A.M. Best said its assessment of the strength and quality of a company?s balance sheet is the underpinning of any financial strength rating.

?In reviewing initial and prospective capitalisation and leverage, A.M. Best begins with the capital requirements of the relevant regulatory authorities,? it said in its report.

?This is followed by a rigorous capital analysis using Best?s Capital Adequacy Ratio to assess the capital that is necessary to support the new venture?s operations over a period of time and that is appropriate for the types of business written.?

It said the new company should demonstrate that it can support the execution of its business plan while maintaining risk-adjusted capital adequacy at levels well above the assigned rating level for at least three to five years.

It said that the degree of additional capital needed will reflect the risk profile of the business and a new company?s sponsors and or strategic investors could significantly affect its success in meeting its objectives.

?Their experience and commitment to the company over the near and long term, including any potential exit strategies, are key considerations in the rating process,? said the report.

?A.M. Best might give credit in the rating where the sponsor is a rated organisation that provides turnkey capability to a new company that, in turn, supports the sponsor?s core business.?

The report said that A.M. Best believed a clearly defined business plan was essential and said the success of the company depended on management?s ability to effectively implement the business plan while remaining responsive to changing conditions.