S&P Tells How It Rates Start-Ups

Standard & Poor’s Rating Services has issued a timely bulletin, entitled “Credit FAQ: Rating The Reinsurance Startups.” The article discusses the criteria the rating agency uses in determining the creditworthiness of new companies and related entries into the insurance marketplace.

S&P notes: “When catastrophic events occur, the insurance industry seeks not just to recover from hits to its earnings and capital but also to increase its capacity to meet expected demand.” Cases in point include Hurricane Andrew, which struck Florida in 1992 and the Twin Towers that were destroyed in 2001. “It is also happening now in the wake of the most destructive hurricane season on record.”

S&P explained: “Capacity needs burgeon–not just because of increased hurricane activity but also because of the potential changes in the Terrorism Risk Insurance Act as well as fears of avian flu or other potential catastrophes–new reinsurance entities and new types of entities are being launched to segment and contain potential future risk.”

The article answers some frequently asked questions about how S&P rates these startups. Among the questions addressed:
— Does Standard & Poor’s assign ratings to startup companies, and does it intend to assign ratings to the reinsurance startups emerging now?
— Can rating agencies assess management talent effectively for a brand-new reinsurance company, especially when so many new companies are drawing from the same talent pool?
— Are Standard & Poor’s ratings assigned to startups with the intention of enabling those companies to do business?
— For the rating on a company to be useful to its marketing efforts, conventional wisdom says it must be, at the very least, ‘A-‘. Does Standard & Poor’s agree, and if so, does Standard & Poor’s expect to assign ratings at this level to any of the current crop of startups?

“Nonlife property-catastrophe reinsurance is a volatile industry with low barriers to entry,” stated S&P’s managing director Stephen J. Dreyer. A disciplined and conservative approach to rating startups is crucial for the industry.

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