The Bermuda reinsurance industry is in better financial shape than it has been for several years and 2007 should be a solid year.

That is the expert opinion of ratings agency A.M. Best, which yesterday presented its second annual Bermuda insurance and reinsurance market briefing at the Fairmont Hamilton Princess.

“Companies’ balance sheets are in better shape than they have been for some years,” Robert DeRose, an assistant vice-president with the Oldwick, New Jersey-based firm, told assembled local reinsurance executives.

“We anticipate that the Bermuda market will continue to generate favourable earnings, although we are seeing rates start to soften.”

Bermuda’s insurance and reinsurance industry made record profits of almost $12 billion in 2006, thanks to a lack of expensive catastrophes, especially the fact that no hurricanes made landfall in the US.

Best’s figures showed the industry made a 19.3 percent return on equity, but predicted that figure would fall to 12.9 percent in 2007. “That is mainly because we expect to see a more normalised storm season this year,” said Peter Dickey, managing senior financial analyst with Best.

The ratings firm also forecast combined ratio would rise from 83.7 percent in 2006 to 94.4 percent percent this year.

Combined ratio is an indication of an insurance company’s profitability — the lower the percentage is, the more profitable were the company’s operations. In 2005, the Bermuda market’s combined ratio was 119 percent.

Bermuda companies shouldered an estimated $11 billion of the insured property losses from the devastating 2005 hurricane season, so last year’s spectacular results marked a huge swing.

The local market is now flush with capital thanks to those profits and a wave of new start-ups since the autumn of 2005. Capital continues to flow into Bermuda from hedge funds and private equity companies. Extra capacity has arrived in alternative forms, such as sidecars, catastrophe bonds and industry loss warranties.

Cat bonds are structured debt instruments that transfer risk associated with low frequency, high severity events to the capital markets. They have been around since the industry faced similar capacity challenges after Hurricane Andrew in 1992.

Sidecars came into vogue after Katrina. They are a form of retrocessional vehicle — that is they provide reinsurance to a sponsoring reinsurer — and may be partially-owned by the ceding reinsurer. The sidecar pays fees to the ceding reinsurer for the business it is fed.

The biggest sidecars, by initial capitalisation, established since Katrina, according to Best, were Flatiron Re, sponsored by Arch Reinsurance with $943 million, AIG’s Concord Re ($730 million) and two XL Capital-sponsored entities, Cyrus Re ($525 million) and Stoneheath Re ($350 million).

The Best representatives said yesterday that the amount of risk capital in cat bonds in 2006 was more than $4.5 billion, with an only slightly lower amount in sidecars. That showed a dramatic growth from 2005, when there had been less than half the amount in each.

Although reinsurance rates are “softening” (or falling), Best predicts a 12-percent increase in net written premiums for 2007 for the Bermuda market.

Mr. DeRose explained: “We expect premiums written to rise as the popularity of sidecars has fallen and some of the growth will come at the expense of the US insurance and reinsurance sector.”

After the meeting, Mr. DeRose said the turnout of some 35 executives had been around half of that at last May’s inaugural briefing, when he said the industry had been grappling with several major issues as it recovered from the losses of 2005.