BC-INSURANCE/BERMUDA (EXCLUSIVE)

EXCLUSIVE-Bermudan insurers struggling in downturn-report

+ Premiums, returns under heavy pressure - report

+ Insurers have to preserve capital - report

+ M&A opportunities "ripe" - report

NEW YORK, Dec 2 (Reuters) - Bermuda-based insurers and reinsurers are struggling in an industry downturn, with deteriorating fundamentals and the trough of the cycle not yet reached, rating agency A.M. Best said in a new report.

The largest players in the market include ACE Ltd, XL, PartnerRe and Everest. They collectively make up just more than half the Bermudan market by net premiums earned in property and casualty insurance, which is the primary focus of companies in the region.

For the first nine months of this year, net premiums written and net earned premiums have fallen, investment income is down, loss and expense ratios are up and return on equity is off sharply for for the 18 publicly traded companies in the market the agency rates.

What financial strength there is, the agency said, is coming in large part from releases of loss reserves, which are boosting returns and keeping expenses under check.

"A.M. Best continues to see more challenges than opportunities as pricing pressures persist, investment portfolios lack sufficient yield, and loss-reserve releases - which are masking the symptoms - are likely drying up," the firm said in the report, which is set for release next week.

In particular, the report noted the volume of catastrophes for the year, while large, has not been enough to force better pricing in the market. In some places, like Chile after the February earthquake, price increases have not been enough to reflect the actual risk involved.

The fundamentals are so weak, the firm's analysts said, that investors are shunning the market and the companies are mostly trading for less than book value. ACE currently trades at a ratio of 1.01 times its book value, but XL is at 0.67 times book, PartnerRe at 0.76 and Everest at 0.75.

Over the longer term, the only way for companies to survive is to preserve capital and position themselves - without being overly aggressive - for the next turn in the market, A.M. Best said.

Given that tendency to preserve capital, the firm said "conditions are ripe" for merger activity, which has been mostly talked about but not pursued. (Reporting by Ben Berkowitz; Editing by Derek Caney)