Bermuda Reinsurers Had Record 2006 Results

London-based reinsurance broker Benfield Group said for Bermuda reinsurers it examined capital grew 24 percent to a record $65 billion last year.

The firm's Bermuda Quarterly report said the reinsurers' capital has doubled since 2002.

Revenues for 2006 wiped out 2005 catastrophe losses, but Benfield said it doubts these results can be sustained.

In a review of the results of 16 companies, Benfield said most companies recouped their hurricane losses from 2005 and reported group net income of $11.6 billion in 2006 compared with a loss of $2.1 billion the year before.

The aggregate combined ratio stood at 86.3 compared with 116.6 in 2005.

Total premium income was 3 percent lower in 2006 than the previous year at $58 billion, but this masked a mix in trends as half of the carriers reported premium increases.

Chris Klein, from Benfield's industry analysis and research team, said: “The record returns of 2006 will be difficult to sustain. Results in 2007 will be challenged by either decreasing rates or increased claims if predictions of greater hurricane activity are fulfilled. It is not surprising that capital management remains firmly on the agenda.”

Benfield said market conditions were reported to be more competitive for Jan. 1 renewals, and the recent legislative restructuring of reinsurance availability by Florida's Citizens Property Insurance Corporation is expected to have a wider effect on capacity and rates.

New capital continues to flow into Bermuda primarily in the form of reinsurance sidecar investments directed at North American catastrophe risks, amounting to more than $3 billion in 2006, Benfield reported.

Sidecars are special-purpose insurance arrangements developed by hedge funds and private equity firms to provide extra underwriting capacity to existing carriers for specific business.

Benfield said that while the use of sidecars extended beyond catastrophe to energy and marine business, the future of some are in doubt. This is primarily due to the creation of Florida's low-cost reinsurance program that will displace the sidecars and direct capital elsewhere.

The report noted the power of credit rating agencies. It said three companies were put out of business by downgrades. They were PXRE, Quanta Capital Holdings' non-Lloyd's business and White Mountains' sidecar Olympus Re. The round of downgrades in 2006 gave way to a period of positive ratings news for the rest of the year, the report said.

Overall, the increase in capital has increased reinsurance capacity, adding to the need for capital management. To meet this challenge XL and Arch are buying back stock while others are looking for market opportunities, Benfield said.

A National Underwriter review of 11 Bermuda insurers' performance (see Feb. 19 issue page 14) found capitalization increased 25 percent from $42.3 billion to $52.9 billion.