Insurance and reinsurance companies make complicated forecasts for their financial performance, even though one key factor that cannot be forecast with any degree of accuracy in the property and catastrophe industry is loss.

In the life sector, mortality rates across large groups of people are reasonably predictable. In property and casualty sectors, especially catastrophe, one event can undo a year's good work, as companies discover whenever massive flooding, serious earthquake or hurricanes occur in highly insured regions.

The loss of the World Trade Centre, though hopefully an extraordinary event, showed that one enormous catastrophe could unseat even some of the biggest players.

Large property and catastrophe reinsurance companies write broadly balanced books of business. The only truly predictable loss experience dictates that there will be losses, because even if no major catastrophe occurs, continuous smaller claims from relatively minor events accumulate. After all, the industry fulfills its function to provide comfort, by paying claims.

The level of claims for the 2002 financial year was relatively benign for those in the property and catastrophe lines. Some of the best claims and overhead experience was recorded by the companies that incorporated in Bermuda in the aftermath of the events of September 11, 2001.

The combined ratio is the total of estimated claims expenses for the period, plus overhead expense, expressed as a percentage of earned premiums. A ratio below 100 percent represents a measure of core profitability, as well as the efficiency of a company's underwriting techniques. Ratios above 100 percent mean that the company failed to earn enough in premiums to cover claims. High ratios occur for one of two reasons, or a combination: underpricing or unexpectedly high claims experience.

That is not to say that companies should achieve 100 percent consistently or indeed ever. No computer model yet invented can foretell the future, although the industry is working on it.

The ratio is not entirely pure, since claims do not always relate to the premiums with which they are being compared. When a company strengthens its reserves on old business such as asbestos-related coverage, the charge is often taken in the current year's claims, The new Bermuda companies were born in an age when interest rates were at historic lows, making the emphasis on underwriting central to the companies' forward motion. It comes as no surprise, in a generally low claims year, to discover that the combined ratios of the new companies all came in well under 100 percent.

Arch Capital Group reported a combined ratio for 2002 of 90.9 percent. Allied World Assurance was strikingly similar at 90.8 percent, which is informative, since these companies write across different lines of business and have different insurance/reinsurance mixes.

Axis Specialty did better, reporting a combined ratio of 70.7 percent.

Montpelier did better still: its combined ratio was 67.4 percent. A new company could not ask for a much stronger performance in its first year, and early growth is enormously important to the capital formation that builds companies. The past is no indicator of future performance, as they say, but the formative years are the most important phase in the lives of those companies that will mature, in time, to become global leaders.

In the new company category, Platinum was not in business for more than a couple of months; its 91.5 percent combined ratio included costs incurred in connection with getting the company going.

Among the established companies, relatively easy claims conditions in 2002 helped many companies return to the right track after 2001, when the severity of World Trade Centre losses distorted results.

Everest Re's combined ratio dropped to 99.0 percent in 2002; it had been 113.5 percent in 2001. White Mountains' Folksamerica subsidiary also reported 99.0 percent for 2002, down from 120.0 percent a year earlier. Many of the other majors were in the same ballpark. Max Re's 2002 combined ratio was 95.0 percent, down from 100.1 percent in 2001. XL Capital achieved a 2002 combined ratio in its general insurance and reinsurance operations of 97.0 percent, versus 139.7 percent in 2001. PartnerRe recorded a 97.9 percent combined ratio in 2002, against 130.2 percent a year earlier.

PXRE did better, capping an excellent year by reporting a combined ratio of 77.7 percent in 2002, against 127.0 percent a year earlier.

IPC Re had an extraordinary year by almost any yardstick: its combined ratio for 2002 was 34.1 percent, against 129.4 percent. Not even Renaissance Re, a perennial leader in this category, could match IPC in 2002. Ren Re reported a combined ratio of 57.1 percent, which is remarkable enough in itself, but its 2001, WTC-affected, combined ratio of 70.2 percent was always going to be a hard act to follow. One or two of the Bermuda majors appeared above the 100 percent line for 2002. ACE recorded a combined ratio of 101.7 percent, against a heavily-WTC affected 111.6 percent in 2001. Trenwick's combined loss and expense ratio for 2002, its annus horribilis, was 128.4 percent, following 132.6 percent a year earlier.

Taken as a whole, the companies mentioned achieved a ratio probably somewhere around the 93 percent mark. That may not sound like much of an achievement, but a company that were able to consistently record a 93 percent combined ratio would prosper well enough.

The problem is that in the world of low-frequency/high-cost catastrophe business, which underpins the Bermuda market, financial results depend to a high degree on Mother Nature.

The assumption of that high degree of uncertainty, through the provision of suitable risk capital, is the raison d'etre of insurance and reinsurance.