December 29, 2011

Research Update:

Bermuda Long-Term Sovereign Rating Lowered To 'AA-' On Revised Rating Methodology; Outlook Stable
Primary Credit Analyst: Nikola G Swann, Toronto (1) 416-507-2582;nikola_swann@standardandpoors.com Secondary Contact: Kelli Bissett, New York (1) 212-438-7573;kelli_bissett@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List

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Research Update:

Bermuda Long-Term Sovereign Rating Lowered To 'AA-' On Revised Rating Methodology; Outlook Stable
Overview
Our revised sovereign rating methodology (newly applied this year) places greater weight on a sovereign's own monetary flexibility, even when that country largely uses the currency of a larger sovereign. We consider monetary flexibility and gaps in official data as credit weaknesses for Bermuda. We are therefore lowering our long-term sovereign rating on Bermuda to 'AA-' from 'AA', and affirming our 'A-1+' short-term rating on the government. The ratings continue to be supported by Bermuda's comparative advantages in the reinsurance sector, its political stability, its prosperity, and its strong government balance sheet. The stable outlook reflects the balance of risks between Bermuda's fiscal flexibility and its external vulnerabilities--most notably to potential changes in U.S. law affecting the offshore reinsurance industry--and the health of Bermuda's primarily locally operating banks.

Rating Action
On Dec. 29, 2011, Standard & Poor's Ratings Services lowered its local and foreign currency long-term sovereign credit ratings on Bermuda to 'AA-' from 'AA'. At the same time, we affirmed our short-term ratings on Bermuda at 'A-1+'. The outlook is stable.

Rationale
The ratings on Bermuda reflect Standard & Poor's opinion of the sovereign's "very strong" political and economic profile and "moderately strong" flexibility and performance profile, as defined in our criteria (see "Sovereign Government Rating Methodology And Assumptions" published June 30, 2011, on RatingsDirect on the Global Credit Portal). Our "very strong" political and economic profile appraisal rests on our view of Bermuda's effective and predictable policymaking and its stable political institutions. Together, they have helped this the largest British Overseas Territory to deliver solid economic growth in the past (real GDP growth averaged 3.4% per year during 1997-2007) and to manage the recent recession (with timely, targeted, and temporary stimulus and deft intervention to support Bank of N.T. Butterfield & Son, Ltd. (BNTB), Bermuda's second-largest

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Research Update: Bermuda Long-Term Sovereign Rating Lowered To 'AA-' On Revised Rating Methodology; Outlook Stable

bank, at minimal direct cost to itself). Our political profile assessment also incorporates our view that public sector transparency (measured by indicators such as the timeliness, frequency, and completeness of statistics and public sector financial reporting) trails that of many higher rated governments. We also view Bermuda's economy, with one of the highest per capita income levels in the world and with a leading position in the global reinsurance sector, as very strong. Like all small jurisdictions, Bermuda has economic concentration risk (in international financial services more broadly), weather risks, and risks associated with its reliance on the U.S. The latter includes the risk that legislative, regulatory, or fiscal measures taken in the U.S. (AA+/Negative/A-1+) could have a material bearing on Bermuda's internationally-focused business community. The "moderately strong" flexibility and performance profile combines an extremely strong fiscal profile, very strong external flexibility, and a lack of monetary flexibility. Bermuda's fiscal profile includes a broadly balanced budgetary position (we expect the annual increase in general government debt to average only 1.7% of GDP in the 2011-2014 period) and a 7% of GDP net asset position. Contingent liabilities are limited in our judgment and principally consist of a recently issued guarantee, in the order of 9% of GDP, for a major renovation of the country's only hospital and indirect risks posed by its banks. The largest, HSBC Bank Bermuda, has a stand-alone credit profile (SACP) of 'a-' and an issuer credit rating (ICR) of 'A+' (see "HSBC Bank Bermuda Ltd. Ratings Lowered To A+/A-1 From AA-/A-1+; Outlook Is Stable," Nov. 29, 2011). BNTB has an SACP of 'bbb+' and an ICR of 'A-' (see "Bank of N.T. Butterfield & Son Ltd. Rating Affirmed At A-/A-2; Outlook Is Negative," Dec. 13, 2011). Although both have experienced some deterioration of credit quality in Bermudian commercial (especially real estate) lending, we view both as very well capitalized under our risk-adjusted capital framework. We view Bermuda's external flexibility as largely balancing high gross external financing needs with an extremely strong external creditor position, even excluding external assets of the nonfinancial private sector. That said, the lack of a recent official estimate of Bermuda's international investment position represents a material data gap. Bermuda operates a currency board arrangement and both the deposits and the claims of the Bermudian banking sector are more than 75% denominated in foreign currency, mostly the U.S. dollar against which the Bermudian dollar trades at a fixed parity. Both circumstances mean that Bermudian monetary conditions are determined mostly by external factors beyond the control of Bermudian authorities. Our transfer and convertibility assessment of Bermuda is 'AAA', reflecting our opinion that the likelihood of Bermuda imposing exchange controls that would interfere with the ability of Bermudian residents to pay foreign currency-denominated debt service is less likely than the government not

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Research Update: Bermuda Long-Term Sovereign Rating Lowered To 'AA-' On Revised Rating Methodology; Outlook Stable

servicing its debt on time.

Outlook
The outlook on Bermuda is stable. The ratings could come under downward pressure if our favorable assessment of policymaking changed, perhaps in the face of the increased fiscal challenges from what we forecast to be a three-to-four-year period of low-to-negative economic growth. Any new banking system problems that weakened the island's balance of payments or produced direct fiscal costs to the government could also weigh on the ratings. Conversely, markedly improved official data coupled with substantially more diversified economic growth could lead us to raise the rating.

Related Criteria And Research

Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Criteria: Sovereign Government Rating Methodology and Assumptions, June 30, 2011 BICRA On Bermuda Assigned At Group 3, Nov. 9, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 HSBC Bank Bermuda Ltd., Oct. 20, 2011 Bank of N.T. Butterfield & Son Ltd., Aug. 31, 2011 Bermudas Structural Credit Characteristics, April 6, 2011

Ratings List
Downgraded, Ratings Affirmed To Bermuda Sovereign Credit Rating Senior Unsecured Ratings Affirmed Bermuda Transfer & Convertibility Assessment Local Currency From

AA-/Stable/A-1+ AA-

AA/Stable/A-1+ AA

AAA

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

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