When is a rating not a rating?

This is the question posed by Morgan Stanley analysts in their latest property and casualty insurance briefing.

The report, prepared by analysts Alice Shroeder, Vinquay Saqi and Chris Winans, said: "Increasingly eager to court new companies, over the years, the rating agencies have gradually relaxed their standards for assigning new ratings... and seemingly have now reached a nadir in which, in our view, the term "standards" seems almost not to apply."

The report gives an overview of how ratings used to be assigned, such as a company being in business for five years with an established track record. It was then possible for a company with sponsorship from a rated insurer to get a faster rating. However, Morgan Stanley said: "More recently, although we haven't tracked this trend by date and can't say exactly when it sprang to life, any company that has raised enough capital, seemingly from any source short of organised crime, can, apparently , get an "excellent" rating.

"We now seem to have reached a new low. It is not necessary even to have money in hand with which a single claim can be paid. A post-office box will do. A.M. Best assigned its A-rating to Danish Re Bermuda, pending the outcome of a $200 million capital raising." The analysts added: "But...oops! The rating agency has egg all over its face, forced to yank the rating after the company suspended its efforts to raise capital, having largely missed the 1/1 renewals.

"What's next? Giving a rating to some guy who has an idea for a start up company but hasn't even incorporated yet?"

"Caveat emptor. A rating used to indicative of claims-paying ability. Now it essentially means something on the order of "presumed innocent until proven otherwise by a jury of its peers, customers and regulators". This unfortunately makes the rating all but meaningless, in our view, and leaves would-be users of ratings to their own devices. Unless and until some standards are restored, we suggest that insurance buyers do their own homework." The Royal Gazette reported on the withdrawing of Danish Re's rating on March 11 after the company failed to secure the $200 million private equity placement offer from Trident II LP, a $1.4 billion private equity fund managed by Marsh subsidiary MMC Capital.

AM Best acted on the company's rating after the equity placement did not materialise by the end of January.

On January 2, A.M. Best said the rating reflected the company's carefully managed growth since its formation in 1999, in anticipation of an upturn in the reinsurance market, excellent prospective capitalisation and strong financial performance and business profile.

A.M. Best said the major rating factors included the company's excellent capitalisation and Danish Re Cayman Holding Limited, the holding company, is to receive a US $200 million capital injection, which A.M. Best expected to be down-streamed to Bermuda.

The additional capital was expected to take Danish Re Bermuda's capital base to approximately $250 million, increasing the underwriting capacity of the group's non-Lloyd's operations, whilst benefiting from Bermuda's beneficial tax and regulatory regime.

A.M. Best also pointed to the company's strong operating performance, namely that Danish Re's decentralised structure enabled business to be quoted and written by the local underwriter.

A.M. Best Co. was established in 1899 and is a rating agency that reports on insurance company's financial positions.