The Class of 2005 reinsurers will have a difficult time securing top financial ratings from Fitch Ratings, the agency said in a statement yesterday. It cited concerns about the longevity of a hard market, the challenge of maintaining management talent and investment by hedge funds among the reasons that insurer financial strength ratings as high as ?A? would be hard for the majority to achieve.

Some 11 new reinsurers are forming in Bermuda in the wake of the reinsurance sector?s record 2005 hurricane losses.

The move by new start-ups to capitalise on anticipated favourable market conditions follows other waves of start-ups which formed in the wake of large sector-wide losses caused by 1992?s Hurricane Andrew and the events of September 11.

While Fitch?s rating methodology does not impose a ceiling on start-up reinsurers? ratings, the agency listed a number of factors that would make it difficult for the majority of the Class of 2005 to achieve top ratings but would not preclude ?secure? ratings in the ?BBB? range.

Fitch expects 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 it sees significant rate increases on property exposures in hurricane-prone areas, it does not expect material increases in premium rates on property exposed business or casualty related business outside of these geographic areas. There is also uncertainty over the longevity of hard market conditions for the property lines that are expected to harden.

In contrast, the Class of 2001 started up at a time when premium rates increased significantly across a broad spectrum of business lines as a result of several factors, including years of inadequate pricing and subsequent adverse reserve development, equity market declines, and September 11 related losses, Fitch said.

While such factors eroded the reinsurance sector?s capital base and essentially imposed underwriting discipline on the reinsurance sector which became evident in the form of rate increases, in 2005 the ?staggering? global reinsurance sector?s hurricane-related losses come after two years of very strong earnings and capital formation, Fitch said.

The aggregate equity of approximately 30 global reinsurers it tracks on an on-going basis increased to $261 billion at year-end 2004 from $173 billion at year-end 2002.

?To the extent the market opportunity leading to the formation of the Class of 2005 is narrow, and ultimately proves to be short-lived, this adds greatly to the uncertainty these reinsurers face in successfully executing their business plans,? Fitch said.

Fitch also added that the expected narrow focus of the Class of 2005 on property/catastrophe related business lines is a risk concentration that has negative implications from a ratings perspective.

Fitch has adopted a tail-value-at risk approach to measure capital levels required to support catastrophe exposure at different rating levels as a robust way to assess capital required to support exposure to potential extreme events and the concentrations come at a time when its adoption is likely to result in heightened capital requirements for property catastrophe reinsurers.

Negative rating implications also stem from a proportionately large amount of capital contributed by hedge funds and private equity investors to the Class of 2005, Fitch said.

?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, as does the risk the companies will be managed with a short-to-medium term business focus, mainly to support an IPO or other exit strategy,? Fitch said.

It added that given the comparatively narrow and shorter-duration market opportunities, the time horizon during which investors in the Class of 2005 can expect to meet their return requirements is shorter than for investors in previous sector re-capitalisations, including the Class of 2001 and the Class of 1992.

This leaves significant uncertainties as to how the Class of 2005?s strategic direction will evolve and also makes the Class of 2005?s credit profile less certain, Fitch said.

With few exceptions, Fitch said one of The Class of 2005?s greatest challenges is obtaining management talent in light of the comparatively large number of companies being formed in such a short period of time. Fitch?s primary concern is whether management will have the depth of experience required to adapt to changing market conditions or to reposition the company.

History suggests that relatively few start-ups exist in their original form three-to-five years after incorporation, Fitch said.

It is also concerned about management?s operational capabilities since start-up reinsurers are often dominated by entrepreneurial underwriters that sometimes lack a strong operational focus.

?Such risks become especially pronounced when market conditions inevitably start to soften,? Fitch said.

While Fitch believes that underwriting talent is generally present among these reinsurers since they would not have been able to raise their substantial amounts of capital with it, Fitch said that underwriting talent may be very concentrated and as a result, generate a significant amount of key-man risk.