Fitch: Bermuda Market Faces Headwinds Following Profitable 2013

Link to Fitch Ratings' Report: Bermuda 2014 Market Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=730896

According to a new Fitch Ratings report, Bermuda (re)insurers will report favorable full year 2013 operating results, driven largely by lower catastrophe losses. However, continued softening market conditions, competition from the growing alternative reinsurance market, and a potential return to more normal catastrophe losses will create earnings pressure in 2014.

Fitch expects the full year 2013 combined ratio for the group of 15 large publicly traded Bermuda (re)insurers that it actively follows to remain near the 86% posted through the first nine months of 2013. Capitalization is flat but will remain strong as intense competition and limited demand means there are likely to be few opportunities to use new capital to generate additional business. As such, Bermuda (re)insurers are likely to continue to return capital to shareholders.

Commercial (re)insurance pricing continues to remain under pressure, with reinsurance business experiencing more pricing pressure than primary business and property pricing declining more than casualty. This is particularly the case for higher-layer property catastrophe excess-of-loss reinsurance business. Given this environment, many Bermuda companies are shifting more capacity into various specialty lines and Lloyd's of London business.

Potentially even more concerning than the recent price declines are the broadening of policy terms and conditions that may signal a deterioration in underwriting discipline. These expanded provisions include more generous reinstatements, increased ceding commissions and added terrorism coverage. These challenging current market conditions have led Fitch to recently assign a negative outlook on the global reinsurance sector.

Valuation multiples are slowly changing in favor of deal making, with many Bermuda companies' market values improving to near or above book value. Fitch believes that the increasing availability of alternative reinsurance could add to this trend by providing further sources of capital to the market while potentially reducing growth opportunities for traditional reinsurers that are in direct competition with the alternative providers.

The full report, 'Bermuda 2014 Market Update', is available on Fitch's website at 'www.fitchratings.com' under 'Insurance' and 'Research'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

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