Bermuda Downgrade Does Not Impact Insurers
Fitch Ratings said that its recent downgrade of Bermuda’s sovereign ratings does not currently impact their ratings of Bermuda-domiciled insurance companies, as Fitch generally views Bermuda-based re/insurance organizations as “being highly isolated from country-related risks in Bermuda.”
A statement from the ratings agency said, “Under Fitch’s rating methodologies, it could rate certain insurance and reinsurance companies at levels at least four notches higher than the sovereign rating of Bermuda. In contrast, in most other countries, insurance company ratings are limited to that of the sovereign, or up to one to two notches above the sovereign.
F”itch provides these comments following the agency’s May 30, 2014 downgrade of Bermuda’s long-term local currency [LC] Issuer Default Rating [IDR] to ‘A+’ from ‘AA-’. This downgrade reflects a fifth consecutive year of economic contraction, continued fiscal deficits, and a rising government debt burden.
“The revision of the Outlook to Stable from Negative reflects Fitch’s expectation that Bermuda’s economic growth will gain pace and that the authorities’ commitment to a reduction in the fiscal deficit will be sustained in 2014-2016.
“The re/insurance companies that Fitch rates that are either Bermuda-domiciled or have significant subsidiaries in Bermuda are generally strong international organizations, with a large and diverse global profile. These companies’ assets, insurance premiums and underwriting exposures are spread across many countries, with very little originating in Bermuda.
“Bermuda-based insurers tend to hold very little if any Bermuda sovereign debt or Bermuda currency. They also maintain relatively minor investments in Bermuda banks and other Bermuda-based companies. While most Bermuda insurers have some level of deposits held at Bermuda banks, these amounts are generally quite limited. In addition, investment custodians are typically located outside of Bermuda.
“As a result of this very limited linkage of Bermuda-based re/insurers to the island’s fiscal issues and local economy, Fitch believes stress experienced by Bermuda would have minimal impact on the credit quality of its (re)insurers.
“Following the recent downgrade, several insurance groups within Fitch’s rated universe currently have Bermuda domiciled ratings at or above Bermuda’s LC IDR rating of ‘A+’.
“These include operating and holding company ratings for PartnerRe Ltd. (‘AA-’ Insurer Financial Strength [IFS], ‘A+’ IDR), and operating company ratings for ACE Limited (‘AA’ IFS), Allied World Assurance Company Holdings, Ltd. (‘A+’ IFS), Arch Capital Group Ltd. (‘A+’ IFS), Axis Capital Holdings Limited (‘A+’ IFS), Everest Re Group, Ltd. (‘AA-’ IFS) and RenaissanceRe Holdings, Ltd. (‘A+’ IFS).
“Fitch would not expect to lower any of these ratings in the event that Bermuda’s LC sovereign rating was downgraded up to at least an additional two notches to ‘A-’. In the event of a more significant downgrade to Bermuda’s sovereign rating to ‘BBB+’ or below, Fitch would consider the circumstances at that time to determine if it would be appropriate to rate Bermuda insurance organizations more than four notches above Bermuda’s LC sovereign rating.”
Fitch has however downgraded Bank of N.T. Butterfield & Son Limited’s preferred stock rating to ‘A+’ from ‘AA-’. The rating action reflects the downgrade of Bermuda’s long-term foreign currency Issuer Default Rating (IDR) to ‘A+’ from ‘AA-’ on May 30, 2014.
The ratings agency said, “BNTB’s preferred stock rating is equalized with Bermuda’s foreign currency long-term IDR of ‘A+’, reflecting the guarantee from the government of Bermuda. The Ministry of Finance agreed to guarantee the principal and dividends on BNTB’s preferred stock when it was issued in 2009.
“BNTB’s preferred stock rating is highly sensitive to any changes in the ability of the Bermuda government to fulfill its obligation. A downgrade in the sovereign rating of Bermuda would trigger a commensurate downgrade of the preferred stock.”
