The Bermudan Q3 results reveal that the hurricane season alone no longer dictates a reinsurer's success

Reinsurers' hopes for a repeat of the financial jackpots of 2006 have been marred slightly by European catastrophe losses and the global credit crunch resulting from the US subprime crisis.

XL Capital, one of the largest Bermudan reinsurers, surprised analysts with a 21% decline in its Q3 net income from $415.8m in 2006 to $328m this year. The company pointed to the net realised losses on investments of $160.2m and net realised and unrealised losses on derivative instruments of $58.2m.

These damaging losses were attributed to “the deterioration in the credit markets”, according to the company. This is one of the first public repercussions from the global credit crunch that had so many people speculating as to the extent of the affects on the reinsurance industry.

"This is more than a blip," said Bill Bergman, reinsurance analyst at Morningstar. "XL has a long-term exposure at the moment but I am positive that it has the chance to ride out the storm, especially given how forthright they have been with their Q3 results."

In a double blow, the company also announced the departure of two of its most senior figures. Brian O’Hara will be retiring as president and chief executive in mid-2008 and chairman Michael Esposito would also be retiring once O'Hara's replacement was found.

Although doubtful that the two events are linked or indeed related, it is a heavy blow for XL in an uncertain time for reinsurers as the fallout from subprime is still being calculated.

“Everest Re's results are a timely reminder that despite all the efforts of the Bermuda high to push the North Atlantic hurricanes away from the vulnerable Gulf of Mexico, Bermudian reinsurers are not immune to cat losses

Bermuda’s largest insurer, meanwhile, seemed to have sidestepped any serious consequences from the credit crunch. Ace reported record net income of $656m compared to $578m the previous year, despite a decline in written premiums.

Property and casualty net written premiums saw a slight decline but it was reinsurance net premiums which really caused concern, seeing a decrease of 24%.

However Morningstar analyst Matt Nellans, speaking to Reuters, was more optimistic. “While reinsurance was down substantially, it looked like they were turning down bad deals more than anything,” he said.

That profits were so high yet premiums so low could be a sign that, as Nellans says, reinsurers are tightening up their underwriting and diversifying into new, more profitable lines.

Joseph Taranto, chairman and CEO of Everest Re, another large Bermudian reinsurer, acknowledged that underwriting discipline was an ongoing goal. “We continue to pursue underwriting and investment discipline. And we remain focused on building shareholder value.”

His comments came after Everest reported a slight increase in net income to $246.6m for Q3. Gross written premiums were $1.07bn, a 3% increase compared to $1.05bn in the third quarter of 2006.

“Although it has been a relatively quiet summer in the western Atlantic, it has not been a completely benign period, as we have seen multiple events of minor to medium severity in various parts of the world

Jim Bryce, CEO, IPCRe

However, the July storm and flooding in England, the earthquake in Peru, and Hurricane Dean, which impacted parts of the Caribbean and Mexico, accounted for the largest portion of the company's total catastrophe losses of $23.9m which contributed 3 percentage points to a combined ratio of 86.6%, up from 83.1% last year.

Everest Re’s results are a timely reminder that despite all the efforts of the Bermuda High weather system to push the North Atlantic hurricanes away from the vulnerable Gulf of Mexico, Bermudian reinsurers are not immune to cat losses.

IPCRe was hit hard by flood losses in July to the tune of $59m, for example, although this had little effect on net income which fell only slightly from $115m to $113.2m. It was, however, the number of medium-severity events that really worried CEO Jim Bryce.

“Although it has been a relatively quiet summer in the western Atlantic, it has not been a completely benign period, as we have seen multiple events of minor to medium severity in various parts of the world,” he confirmed.

“We believe that these events, combined with the fact that we have seen strong earthquakes and two category 5 hurricanes occur this summer, should remind underwriters of the need to maintain discipline if we are to attain the appropriate long-term return on equity for shareholders.”

In a year that has seen a rise in freak weather events across the world, from cyclones in Oman to deadly fires in Greece, it may be the case from now on that a benign North Atlantic hurricane season does not spell a benign catastrophe loss year for reinsurers.

"The world is a risky place but its the long-term view we have to consider," added Bergman. "The most valuable trend at the moment is global diversification. This is crucial going forward."