Fitch Says Bermuda (Re)Insurers Should Weather Sovereign Downgrade

June 29, 2012

According to Fitch Ratings, “while insurance industry concerns factored into Tuesday’s downgrade of Bermuda,” it does not expect Bermuda (re)insurers to be affected, “as all our ratings of Bermuda (re)insurers remain below the new sovereign rating, which also has a Stable Rating Outlook. The country ceiling remains at ‘AAA.'”

In addition Fitch noted that a “majority of the assets and liabilities of Bermuda (re)insurers are diversified globally, and thus we do not have concerns regarding a concentration of risk in the country.

“We do expect that Bermuda, as a nimble market with close U.S. proximity that rapidly adapts to fit capacity needs, will continue to remain an important global (re)insurance market and should be well positioned to take advantage of recent improvements in the underwriting environment.

“Furthermore, Bermuda (re)insurers overall weathered the recent heightened catastrophe losses seen in 2010 and 2011, although some companies experienced more strain than others.”

However, Fitch also pointed out that it believes “a shifting regulatory landscape continues to present both opportunities and threats, as the island faces competition from other jurisdictions, tax-status scrutiny, and changing collateral rules.”

The rating agency explained that “insurers operating under Solvency II will likely be required to hold more risk capital, which may boost reinsurance demand. Bermuda is one of the first three jurisdictions seeking Solvency II equivalent status (Japan and Switzerland being the other two), and the Bermuda Monetary Authority (BMA) is optimistic that implementation could be achieved by 2014.

“With that, we feel Bermuda’s regulatory framework will, at a minimum, become less flexible as a function of its seeking equivalence, thus reducing its appeal as the preferred location for start-up companies. However, its overall market reputation should improve, with further enhancement of the island’s solvency protection standards.”

Source: Fitch Ratings.

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