Companies that pursue diversification will be able to build long term success in the reinsurance industry, Hiscox chief executive Bronek Masojada told an international reinsurance conference last week.

The deputy chairman of Lloyd's of London and immediate past president of the Insurance Institute of London, Mr. Masojada was among a panel of experts at the 2006 Hawksmere Conference at the Fairmont Hamilton discussing "2005 A Catastrophe ? New Bermuda Capital."

Joan Lamm-Tennant, president of General Re Capital Consultants (GRCC) asked whether the strength of the Island's insurance industry was due to "Dynamism, cowboy capitalism or hot money chasing returns".

She said the class of 2005 represent $7.5 billion in capital. "Talent and execution and leadership is very critical to the Class of 2005," she added.

"In terms of the events of 2005, I think it is pretty clear that a model is only a model, diversification pays and the capital markets, if tickled properly, will provide," Mr. Masojada said.

"The losses of last year were an earnings event rather than a balance sheet event. The companies that created value and had a better combined ratio over time were the ones that had a more diversified portfolio."

Mr. Masojada said Hiscox sustained 70 percent of hurricane losses from the hurricane season of 2005.

But Hiscox has a very diverse portfolio of business involving reinsurance, business interruption, commercial property, energy, marine, fine political risk, kidnap and ransom, aerospace and a range of retail business, meaning it was able to limit its exposure to the losses of the 2005 hurricane season.

"Where do I the think the class of 2005 and 2001 can go from here? They can hope and pray, have a great run this year, make a great return and return money to shareholders. I think that is a fundamentally flawed strategy.

"You can diversify your business and capital or you can try to diversify through consolidation."

He said one of the reasons that Axis had such a good combined ratio was that after the September 11 terrorist attacks, chief executive John Charman pursued a strategy to diversify lines of business from all over world.

Mr. Masojada also said in Bermuda, Hiscox has established a reinsurance business with 14 people and expected to write $175 million dollars in catastrophe premium, while the the company's US operation with 30 people, expects to write $25 million dollars in gross written premium

"Building diversification is tough, hard work, it takes time but ultimately it pays off with the basis of your business mix, resilience of your balance sheet and the quality of your product to give to policy holders but not something you can do overnight, it takes time."

Mr. Masojada said diversification can be achieved through new sources of capital and Bermudian companies have been very successful in raising capital through sidecars.

"At Hiscox, we are doing both the traditional sidecar plus we have 25 percent of our capital from third party members. This additional source of capital is clearly good both for the customer and for the industry.

"What is the essence of the sidecar ? a sidecar is a few smart guys in a dark room, working very hard to churn out a lot of documents and make a lot of money."

"Its about leveraging a lot of capital into an undiversified business to reduce the risk but it doesn't build long term sustainable business."

He said the other alternative strategy is consolidation among players in the industry but he said this unlikely to happen and would not be good for policy shareholders or shareholders.

Mr. Masojada questioned whether the class of 2005 would be willing to follow a strategy of diversification.

"There is a merry go round in Bermuda with a jangle full of hot money chasing returns, you have a main loss event, you get hold of the people who understand how to write this business and get hold of private equity money and put together hope and pray portfolio."

"The future of the 2005 start ups is quite interesting, they have a choice, do they want to build businesses of enduring value, do they have the grit and the determination to do that slowly over time, piece by piece or do they want to keep going around the merry go round."

Paul Nealon, chief risk officer at Ariel Re, said according to one leading broker Bermuda accounts for more than 50 percent of the catastrophe capacity.

Mr. Nealon also quoted another leading broker saying there is an $11 billion shortfall in supply and demand and the 2007 season is shaping up to be a very good one.

'We believe Bermuda will continue to be the catastrophe capacity capital of the world and we expect Bermuda will have more than 50 percent of the captive capacity," he said.