Reinsurers hit by big losses from the 2005 hurricanes of Katrina, Rita and Wilma who have since sought to diversify into non-catastrophe business lines are facing diminishing returns.

And the flip-side of the emerging picture shows that "unfashionable" mono-line catastrophe reinsurers are actually the ones seeing better profitability margins.

In the aftermath of the 9/11 terrorism attacks the market cycle allowed profitability to be found in catastrophe and non-catastrophe lines, something that powered newcomers such as Arch and Axis into strong industry positions.

But post-2005 things are different, Hiscox Group chief underwriting officer Robert Childs explained in a keynote speech to The International Reinsurance Summit 2007 at the Fairmont Hamilton Princess Hotel.

"History is not repeating. After the World Trade Center the catastrophe prices went up and so did the other (non-catastrophe) prices. Arch and Axis, founded in 2001, benefited from that because they were able to diversify rapidly in profitable business. It is much more difficult now, it is a different part of the cycle. The cycle is still there but with different characteristics."

Mr. Childs illustrated this with a graph showing the rise in profitability of catastrophe business lines since 2005, with premiums higher and risk coverage reduced, while the returns from non-catastrophe business lines are tailing off.

The redirecting of so much capital towards non-catastrophe lines is bringing down the profitability margins in that area.

The Hiscox executive examined what is happening to prices in the reinsurance market and highlighted trends that have occurred since 1992 when Hurricane Andrew dealt a blow to the Lloyd's of London market and benefited the young Bermuda reinsurance scene as new start-ups took advantage of opportunities created by a world-wide reduction in capital available through Lloyd's.

What happened in London in 1992 was repeated in Bermuda in 2005 as the bad US hurricane season, estimated to have cost the world-wide reinsurance market $70 billion — and Bermuda-based companies $17bn — led to an influx of new start-ups eager to carve a market niche in the immediate aftermath.

Mr. Childs showed that the 10 percent reduction in Lloyd's capacity following Hurricane Andrew in 1992 was practically mirrored by the reduction in capacity of Bermuda's established reinsurers in 2005.

"The 15 companies existing in Bermuda before 2004 saw income go down in 2006. They decided to increase rates and decrease exposure," he said.

"It was this reduction, the Bermuda companies apeing what happened in the Lloyd's market in 1992, that gave the opportunity for the start-ups and hedge funds in Bermuda.

"I find it interesting. The existing companies, I think, are trapped by their own history. When you are an established company you have rating agencies (to worry about), you have possibly a different expectation by your shareholders and, if you have just experienced the biggest loss you have ever known, there is a certain element of executive fear."

Those to benefit were the new reinsurance start-ups, nearly all in Bermuda, new side-cars and hedge funds. Mr. Childs said Hiscox were a prime example, setting up in Bermuda and also creating its own sidecar Panther Re.

Since the 2005 hurricane season reinsurers have cut risk exposure in the US Gulf region while generating the same premiums, said Mr. Childs.

The trend to diversify has led to profit margins for non-catastrophe business lines going down.

"Insurance companies are about supply and demand. As supply increase the graph goes down. Companies are seeking balance and diversity. But it is a curious balance — they are seeking the balance in lines of business where the margins are reducing," said Mr. Childs.

He said he had recently spoken with a financial analyst who had described mono-line catastrophe writers as "unfashionable" following Katrina and the 2005 hurricane season, yet information now shows they are the ones enjoying the better profit margin returns compared to those that have diversified into non-catastrophe business.

Mr. Childs said: "I find it curious when you talk to financial analysts to discover that fashion means something. Looking at the graph it appears the mono-line cat writers may have it right after all because they are seeking the business that has margin."