Fitch Ratings assigned a stable outlook to the Bermuda market this week, marking the first time the rating agency has assigned a rating outlook to the segment, a member of the firm said yesterday.

James Auden, managing director of Fitch's North American insurance group in Chicago, said the stable outlook indicates the rating actions on Bermuda companies are expected to consist predominately of affirmations over the next 12-18 months.

In addition, upgrade and downgrade actions are likely to approximate each other, said Mr. Auden, who was speaking on a conference call to explain the findings contained in his firm's just-released report on the Bermuda Market.

Mr. Auden said Fitch currently has published ratings on 18 Bermuda entities, and that the rating agency plans to expand rating coverage over the near term.

Mark Rouck, lead author of the report, “Bermuda Market Overview,” said the average financial-strength rating for 18 Bermuda entities currently rated by Fitch is “double-A-minus” (using net premiums as weights). The high overall rating level, he said, is supported by the fact that recent years' profits drove significant improvements in the collective balance sheet and capital position of the group.

During the conference call, Greg Dickerson, an associate director and co-author based in New York, reviewed recent financial results and presented projections for 2008, noting that Fitch expects a composite of 22 Bermuda companies to post an aggregate combined ratio between 89 and 94, assuming an average level of catastrophe losses (5 loss ratio points).

He also said the expected return on average equity (ROAE) is between 11 percent and 14 percent, noting that in the last two years combined ratios have hovered in the high 80s and returns have been in the mid-to-high teens.

As for the overall “stable” Bermuda outlook, the analysts said it mirrors the outlooks Fitch has in place for the North American property-casualty sector and the global reinsurance sector, noting that the three sectors face some similar challenges–namely, maintaining profits during a soft market and managing capital.

In addition, they said the Bermuda market faces several unique challenges, like:

o Managing expansion strategies

o Coping with infrastructure challenges

o Maintaining and applying modeling and risk management skills

o Maintaining Bermuda's tax advantage

Mr. Rouck said it would take either a prolonged soft market–like that of the late 1990s–or outsized catastrophe or investment losses to prompt Fitch to change the stable Bermuda outlook to negative.

Short of that, however, the analysts cited potential positive and negative outcomes of each of the unique challenges they said could impact the ratings of Bermuda insurers individually.

For example, commenting on the challenge of managing expansion strategies, such as recent forays into the U.S. excess and surplus lines market and London by a handful of Bermudians, Mr. Rouck said they come with a high amount of day-to-day operational risk, “especially since these markets have a history of taking advantage of new entrants.”

On the other hand, expansion efforts may positively position companies to take advantage of future turns in the underwriting cycle, he said.

On another positive note, when discussing the less unique challenge of managing capital, he noted that even with share repurchases accumulating to $4 billion, Bermuda insurers that have been in business for two years or more saw total equity grow by $5.2 billion between 2006 and 2007.

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Fitch Assigns Stable Outlook To Bermuda Market

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