A.M. Best Co. has warned that finite reinsurance companies have a poor historical track record and it remains cautious about the sector.

And it said the "heightened level of scrutiny" being given to finite reinsurance transactions" has increased its concerns.

A.M. Best made the announcement in the wake of news that New York State Attorney General Eliot Spitzer and the US Securities and Exchange Commission are examining the transactions, which are often used to "smooth" earnings for companies.

Best this week gave Barbados-based Imagine Insurance Company Ltd. an A- (Excellent) rating, saying that although the company, which is owned by a Bermuda holding company, engages in finite reinsurance underwriting, most of its transactions "do not fall under the strict definition of finite risk products and are merely traditional reinsurance arrangements, which include contractual caps or other loss mitigating features".

Finite risk transactions have come under fire from US regulators when the policy is determined to not be insurance, in which true risk is transferred from one party to another, but a financing arrangement in which the premium paid by the company buying the coverage is seen as a deposit or a loan. In such a case, the beneficial accounting treatment disappears.

The New York Times reported on Monday that Mr. Spitzer and the SEC are now investigating the sector. Bermuda-based ACE Ltd., the St. Paul Travelers Companies and Zurich Financial Services have all received subpoenas relating to finite risk policies, although no wrongdoing has been alleged.

On Monday, A.M. Best said: "A.M. Best remains cautious of the overall finite business segment due to the poor historical track record of previously established finite reinsurers that have either curtailed or ceased doing business.

"This fact is now more relevant given the heightened level of scrutiny currently focused on finite reinsurance transactions and the unfavourable view being taken by state and federal regulators as regards to insufficient risk transfer, financial smoothing and the possible negative implications on both sellers and buyers of finite products."

With regard to Imagine, Best said its strong ratings reflected Imagine's global strategy of writing specialty insurance and reinsurance, solid returns since inception and strong support provided by its ultimate parent, Brascan Corporation.

"Although Imagine maintains a balanced specialty risk underwriting portfolio, A.M. Best has concerns with the potential operational risk associated with a limited number of finite reinsurance deals that Imagine entered into over the past few years," the agency said. It should be stressed that the vast majority of Imagine's transactions do not fall under the strict definition of finite risk products and are merely traditional reinsurance arrangements, which include contractual caps or other loss mitigating features."