Several Bermuda insurance companies gave earnings warnings to an audience of investors and analysts at yesterday's Bermuda Angle conference, saying that their investment incomes could fall short of the mark.

The first three companies to present to analysts and investors at the annual conference now in its eleventh year - XL Capital, Partner Re and Max Re - pointed to unfavourable market conditions bearing on their investment returns in some way.

XL CEO Brian O'Hara concluded his presentation by giving investors and analysts a peek into the company's third quarter results set to be released at the end of the month.

He said that given the bad state of investment markets, there could be a slight negative variation from expected operating earnings resulting from lower than expected investment income. Still on the subject of third quarter results, Mr. O'Hara indicated that the company estimated its net losses from the European floods to be approximately $50 million although he added that XL's otherwise "good property catastrophe experience" in the quarter should offset those losses.

Despite XL's earnings warning, leading insurance analyst Alice Schroeder - who is on the Island for the conference - said Morgan Stanley still viewed XL as an attractive investment: "We continue to like the stock and believe it is one of the better positioned companies to benefit from the favourable pricing environment. "We think XL potentially stands to benefit from the weakening condition of the European insurers who are seeing their capital dwindle because of declining equity markets," she continued. Meanwhile, Partner Re CEO Patrick Thiele said the company was still on track to deliver "competitive returns" to shareholders but he also spoke of the "real negatives in the (current) reinsurance industry" stemming primarily from the weak economic environment.

Mr. Thiele said that in a bond era of only three to four percent returns it was difficult to grow earnings but he underscored the company's strong underwriting skills. As a result, he said the company was expecting to deliver competitive returns (around 13 percent): "We have confidence - on a yearly (over quarterly) basis - of achieving that."

Ms Schroeder said: "Partner Re said it is leaning toward a tactical portfolio reallocation that would shorten the duration of its bond portfolio. We note this would protect book value in a rising rate environment but may also reduce investment income. We view this as a warning that investment income may be lower than expected in 2003," she said. The third company presenting at yesterday's conference - Max Re - had already made no bones that poor investment income was a thorny issue.

And yesterday CEO Robert Cooney said: "I'll be candid. We couldn't have picked a worse environment to launch a company with a focus on (investment) returns in 2000."

But Mr. Cooney said the company's "flexibility" would allow it to shift its strategy and he underscored that the company possessed "significant P&C marketing and underwriting skills".

"Spread business is challenged," he said, and added that the company would also move into alternative risk transfer (ART) vehicles. To this end Max Re, which only went public in August, 2001, said it would be "augmenting" its team in coming months with specialised insurance and reinsurance staff. At present the company reported it had four senior underwriters and six actuaries. Mr. Cooney said ART - which he described as a combination of risk transfer and risk financing, and a good place to be as it did not involve open- ended liabilities - was set to be the core focus of Max Re's underwriting operations.

Mr. Cooney concluded that in the current market: "We get better paid to take underwriting rather than asset risk," and he predicted that "favourable underwriting conditions" would continue for some time.

But at least one analyst drew parallels between the company's shift to ART and the now troubled-fate of Bermuda insurance services company Mutual Risk Management.

But Mr. Cooney said there were distinct differences between the two companies: "MRM was in a way more a service company but with huge reinsurance recoverables risk, which was really its Achilles' heel. "MRM and Max Re are both in ART but they are entirely different businesses in my opinion," Mr. Cooney concluded.

In the end the investment earnings warnings from these three insurers could be a harbinger of things to come with Ms Schroeder underscoring that other insurers could be facing the same fortune: "This quarter is likely to present a Waterloo on the issue of investment income for insurers. We have attempted to stay ahead of this issue, but remain frustrated at the difficulty of doing so as rates continue to decline," she said.