Bermuda global insurer and reinsurer XL Capital Ltd has cut back its exposure in the Gulf of Mexico because of rising ocean temperatures that make intense storms more likely.

And the company’s chief executive Brian O’Hara believes insurers face a “worrying situation” as they deal with the uncertain effects of climate change.

Speaking in New Orleans, where he is attending the annual conference of the Risk and Insurance Management Society (RIMS), Mr. O’Hara said: “It’s a fact that the water temperature in the Gulf of Mexico is higher than normal and appears to be rising.

“We have cut back on the amount of capacity that we’ve been willing to put at risk in the oil rig platform business and also in coastal areas around the Gulf. If you have to bet on the hurricane forecast, then unfortunately with that rising water temperature, it has big ramifications for risk taking.”

Insurers cutting back their risk in the Gulf had presented opportunities for newcomers in the Bermuda market to write some business in the region, Mr. O’Hara said.

“As for the wider picture, there’s a lot of speculation and extrapolation — it’s a worrying situation that we all have to watch very closely, and this is why, as an industry, we can’t afford to be cavalier in the risks that we take,” the CEO added.

“We have to be careful and conservative, because we aren’t sure what the overall ramifications of climate change will be.”

Commenting on the industry’s bumper profits of last year and the first quarter of 2007, Mr. O’Hara said some success was badly needed after some tumultuous years for the industry since 2001. Last week XL announced record first-quarter net income of more than $550 million.

“We’ve had five good quarters in a row and while it does give me pleasure, we need this to continue for some time,” Mr. O’Hara said.

“We’ve been through a lot of trying times with the 2004-05 hurricanes and going back to 9/11, but it hasn’t killed us and it’s made us a lot stronger and much better in dealing with the

kind of risks we take on as a business. We think we’re in the best shape we’ve ever been in, but I won’t feel really good until we’ve got another five quarters of good results under our belts.”

As for future growth, XL is well positioned to take a slice of the new business coming about as a result of the rapid expansion of the economies of the developing world.

Mr. O’Hara also sees opportunities for growth in the US.

“In Brazil, one of the fastest-growing economies that has great potential, we opted to go the joint venture route with Banco Itau and that’s off to a very good start.

“In China, we’ve been getting in position to apply for a licence. We have 200 policies for our global customers that are issued by a Chinese company on our behalf. We would like to be in a position to service that business directly ourselves.

“And we would like to be a service provider to the growing Chinese multi-national companies emerging. The developing world is a great source of potential future business and we are fortunate that we have natural organic growth opportunities in the biggest, most developed market, the US, but we’re also positioning ourselves for growth in the emerging world.”

With dozens of insurers and reinsurers having incorporated in Bermuda since 2005, Mr. O’Hara said competition for business was greater, but companies were not slashing rates to unreasonable levels to gain a bigger market share.

“In many ways I think this is an up period of competitiveness, but in an equilibrium sort of way,” he said. “I think there’s a lot of discipline in the market, mainly because of all the challenges we’ve faced as an industry and the knowledge — after 9-11 and the hurricanes — that bad things happen and will continue to happen, so you have to be ever-vigilant.”

XL cuts Gulf of Mexico exposure