Another excellent year seems to be on the cards for Bermudian insurers and reinsurers, according to Standard & Poor's Rating Services (S&P).

In the past few years, these companies have enjoyed very strong earnings and operating performance as well as increased capital.

But the market has been changing, and these firms, in addition to the re/insurance industry as a whole, are finding themselves in the midst of softening conditions.

S&P, however, are cautiously optimistic that Bermuda's insurance and reinsurance companies have positioned themselves well to face the challenging times ahead with enhanced enterprise risk management practices (ERM), a focus on profitable underwriting and prudent capital management.

Of those companies rated by S&P, ACE and XL Capital both stand out with a credit rating of A- and a financial strength rating (FSR) of A+, while PartnerRe boasts a credit rating of A and FSR of AA- and Renaissance Re's ratings are A- and A+ respectively.

Despite numerous natural disasters this year such as Windstorm Kyrill, the UK and Australian floods and the Atlantic hurricanes, Bermudian companies collectively had one of the strongest operating results on record in the first nine months of 2007, with a weighted average combined ratio of 83.2 percent and a weighted average return on revenue of 29.2 percent.

For the first three quarters of 2007, the Bermudian firms maintained their profit streak, as earnings this fiscal year reflected some of the rate increases of last year, while favourable reserve development from recent underwriting years, strong investment income and less reserve strengthening for prior accident years have helped boost earnings and strengthen balance sheets.

The peer group's investment exposure to the sub-prime market disruption have been minimal, which is in line with that of the rest of the insurance industry.

But, nonetheless, because of the possibility of sub-prime-related litigation, some of these companies could be exposed to losses stemming from underwriting professional liability coverage, and the full effect might not be clear until 2008 or beyond, claims S&P.

For the most part, 2007 has been without relatively major catastrophe insured losses, but the frequency of events has been higher than usual and S&P does not expect that these events will have a significant impact on pricing going into next year.

So far this year, prices have softened across all lines, with decreases of five to 15 percent depending on the region, coverage class and account size.

In addition, terms and conditions have been increasingly under pressure; this has been most prominent in the primary market, but there has also been some evidence of it along the edges of the reinsurance market, with casualty reinsurance rates falling at low double-digit rates.

On the property side, including US property catastrophe, rates have also been declining, though to a lesser extent than in casualty lines, and S&P expect similar trends in 2008.

Reinsurance premiums have remained relatively flat across the board, as most of these companies have begun to pull back writings, while cedants are increasing their retentions or shirting to excess-of-loss treaties.

Many of these reinsurers are focusing on disciplined and profitable underwriting as opposed to market share, as they have used better risk-modelling tools and overall improved ERM, allowing them to mitigate some of the effects of the softening cycle, said S&P.

In general, reinsurers have behaved rationally in the marketplace, but if their ERM practices fail to hold up and they start leading the market down by providing cheap capacity, the insurance market could quickly slip into more competitive levels, similar to those seen in the late 1990s, the ratings agency added.

The benefits of being in both the Bermuda and Lloyd's of London markets are also clear to see, as witnessed by the recent acquisitions of Talbot Holdings and Atrium Underwriting by two new class of 2005 companies, Validus Holdings and Ariel Holdings, respectively, with Lloyd's providing an international distribution platform and allowing improved geographic and product diversification.

Given the record profits posted in 2006 and through the first nine months of this year, the group's shareholders' equity jumped by a healthy 13 percent to $72 billion as of the end of September, compared to December 30 last year.

Year-to-date, the group bought back about $2.7 billion of its shares, which made up 3.7 percent of shareholders' equity as of September 30, with ACE accounting for the largest slice of shareholders' equity at 22 percent and rivals and neighbours XL 16 percent.

The future outlook is that current ratings on this group are expected to be relatively stable over the next six months, concluded S&P.