Bermuda re/insurers stable after downgrade
Bermuda’s re/insurers received welcome reassurance this week when Fitch confirmed that their financial strength ratings will not be limited by the sovereign debt rating of Bermuda.
On June 7, Fitch downgraded Bermuda's long-term foreign currency IDR to AA- from AA, its long-term local currency IDR to AA- from AA+ and the country ceiling rating to AA+ from 'AAA'.
Normally, the ratings of re/insurers are limited to that of the sovereign, or one or two notches above. Fitch confirmed that companies such as ACE, which has a financial strength rating of AA (one notch above the sovereign long-term foreign currency and local currency IDR) may be rated two or more notches higher than the sovereign rating going forward. It said this was because its large and diverse global profile limits its exposure to Bermuda sovereign risk.
“The highest rating that we currently have for a Bermuda company is AA for ACE. That would imply that Bermuda’s rating would have to go down at least three notches—and potentially into the BBB range—before we would consider moving it,” said Brian Schneider, senior director of insurance at Fitch.
Explaining why Bermuda companies are relatively protected from the sovereign downgrade, Schneider said: “There’s not much sovereign debt available for purchase, and also these companies manage their risk as global insurance companies, not as Bermuda insurance companies. That makes it unique in that it’s not tied to Bermuda from a financial and logistical standpoint. The majority of the people working for these larger Bermuda companies are not on the island itself. These companies have the capabilities to tap into talent all around the globe.”
Schneider continued: “Where you may start to see issues—but we don’t see those in the near term—is if the regulatory operations of the country are affected. If there are broader issues affecting the Island and they have to spend less time or fewer resources on their regulation, that could impact whether companies decide to stay on the island.”
He concluded: “There’s a lot of give and take between insurance companies and regulators; they’re both better off by working together and making sure that there are strong insurance companies within any jurisdiction. I don’t know if there’s much Bermuda reinsurance companies can do to help the country itself; there are always going to be benefits to being on the Island, but at the same time these companies are very sophisticated managers of their risk. If they need to leave at some point they certainly have the capabilities to that, and I expect they’ll continue to protect their own interests if they do remain on the island.”
