Bermuda-based reinsurers saw their their 2006 net income soar to $5 billion and their combined ratios plummet and after a relatively mild hurricane season, according to a recent report by Fitch Ratings.

But it warned that the likelihood of lower rates in 2007 and 2008 may expose differences in the companies’ abilities to weather a soft market.

Fitch said the Bermuda reinsurers tend to derive most of their premium revenue from US-based risks. Given the sharply lower catastrophe-related losses in the US this year, reinsurers generated “very strong profitability” through the first nine months of 2006.

“Total net income soared to US$5 billion — enough to offset 2005’s total net loss by 1.7 times.” In addition, the group’s nine-month, 2006 results exceeded the US$4.3 billion of net income it earned in 2003, its recent high-water mark.

“Through the first nine months of 2006, the average of the multiline reinsurers’ combined ratios declined by roughly 30 points from the prior-year period and from full-year 2005,” Fitch reported. “Fitch estimates that 80 percent to 90 percent of this improvement reflects the impact of 2006’s lack of catastrophe losses in comparison to 2005’s record losses.

“The effect of 2006’s lower catastrophe losses is even more pronounced when looking at the change in the average of the property reinsurers’ combined ratios. Through the first nine months of 2006 the average combined ratio of property reinsurers declined by 150 points from the prior-year period and by 163 points from full-year 2005.”

However, despite these nearly uniform strong results, Fitch said the real test willcome in 2007 and 2008 when rates are expected to soften.

“The agency continues to believe that there is a wide divergence in longer-term key financial metrics among these reinsurers,” Fitch said. “

Fitch’s expectation is that full-year 2006 results will be strong for these Bermuda-based reinsurers and for the overall reinsurance sector.

But it said the competitive environment will intensify throughout 2007 and into 2008.

“As premium rates decline and the next soft phase of the reinsurance underwriting cycle takes hold, Fitch anticipates that earnings will come under pressure and reinsurers’ cycle management capabilities will be tested.

“Fitch believes that the ability to maintain competitive positioning, risk-based capitalisation, and underwriting discipline during this coming soft market will be key differentiating factors for reinsurers going forward.”