Fitch has maintained a "negative" rating outlook for the Bermuda insurance and reinsurance market — but it believes that the Island's companies are less likely to be downgraded than competitors elsewhere.

Uncertainty tied to the continued highly volatile investment markets and a more severe economic recession than those experienced in past business cycles are the main factors behind Fitch's continued negative outlook.

Fitch said earlier this week that it expected to downgrade half of insurers globally as it places heightened emphasis on vulnerability to volatile market conditions when considering companies' credit ratings.

However, in a special report on the Bermuda insurance market published yesterday, Fitch said: "While not immune to trends and conditions contributing to this downward activity, Fitch believes that Bermuda (re)insurers in aggregate, are less likely to face widespread rating downgrades primarily because of their comparatively low asset leverage and high-quality investment portfolios."

The ratings agency added: "While adversity persists in 2009, Fitch believes that the Bermuda market is generally positioned to withstand the current environment and potentially benefit from some opportunities as well."

Fitch also commented on what it perceives to be a growing threat to the Bermuda market's tax advantage over US rivals from potential changes in the US tax code.

"With a growing US budget deficit, realignment of Congress, the current difficult economic environment and the heightened focus on protecting domestic companies, there appears to be a momentum towards action," Fitch said.

"Additionally, several Bermuda-domiciled (re)insurers, Ace Ltd., Flagstone Holdings and Paris Re, all of which moved portions of their operations from Bermuda, may have been, at least in part, reacting to potentially less desirable US tax laws."

Fitch's analysis over the period from 2004 through September 2008 showed that Bermuda (re) insurers enjoyed an effective tax rate 18.2 percentage points lower than their US property and casualty competitors.

A key challenge for the Bermuda market would be to raise capital in the current market conditions, should a major catastrophe event cause heavy claims, since conditions would make it far harder to recapitalise than after massive losses stemming from Hurricane Katrina in 2005 and the 9/11 terrorist attacks in 2001.

Asset losses in 2008 eroded Bermuda companies' strong capital positions. In the first nine months of 2008, the Bermuda (re) insurers covered by Fitch reported an average 11.8 percent fall in shareholders' equity. The most dramatic falls were suffered by AIG's Bermuda-based subsidiary Aegis (minus 21.3 percent) and Max Capital (minus 19.5 percent).

Another challenge will emanate from professional liability claims likely to result from investors who have suffered losses during the credit crisis suing directors and officers. As the Bermuda market derives a higher proportion of professional liability premiums than the US, Fitch expects Bermuda to bear heavier losses.

Uncertainty surrounding estimates of losses relating to last September's Hurricane Ike — which caused an unusually high amount of damage inland — presented an added challenge to some Bermuda companies, which could continue into the first quarter, Fitch said.

The difficulties of AIG, which was rescued by a US Government bailout last September, presented opportunities for the Bermuda market, as insureds look to spread their risk coverage among more companies, as well as from key staff that depart the US giant.

An upward trend in rates in lines such as property catastrophe and offshore energy insurance, in which Bermuda has a large market share, would also be beneficial to Island companies.

Another plus for Bermuda is the erosion of capital suffered by many primary insurers in 2008 that should increase reinsurance demand.