Bermuda's key insurance industry players have been given the thumbs up from top ratings agency Standard & Poor's.

Standard & Poor's believes the 17 insurers featured in their listings are all overwhelmingly in the 'A' category have a strong ability to pay claims and that the financial strength of Bermuda's insurance sector is very healthy.

Tokio Millennium Re and Top Layer Re all received AA financial strength ratings, while Everest Re, XL Hannover Re Bermuda and Partner were not far behind, being awarded AA- ratings. Meanwhile Ace, XL Capital Ltd. and Renaissance secured ratings of A+.

The agency reckons there would be no defaults on the companies listed if they were forced to deal with natural disaster events similar to those of 2005, including Hurricanes Katrina, Rita and Wilma, citing only one company that went into run-off and several that tapped the capital markets to replace capital that was lost due to severe hurricanes two years ago, but none that went into default.

It goes on to point out that despite most of the catastrophe models assuming a higher frequency and severity of storms, the industry has not stood still over the last couple of years and the majority of companies have developed their own modelling and underwriting capabilities in that time.

Natural disaster risks are more actively managed and the insurance sector has used traditional forms of reinsurance to transfer that risk to the capital markets, according to Standard & Poor's.

Furthermore, they say, many companies have gained greater diversity in their operating profiles compared to a few years ago, and are no longer subject to the same concentrations of catastrophe risk as before.

Standard & Poor's also believe that diversification by Bermuda insurers can be a good thing if it is well conceived to spread risk and reduce volatility in earnings, but they warned that many diversification plans that look good in theory fail in practice, depending on the effectiveness of managing the plan.

But, equally, the ratings agency reckons the same is not true of the reverse, that a lack of diversification is a not a bad thing.

They said that if a company has a high tolerance for risk and is willing to accept the volatility that goes with a high degree of concentration, it should be compensated for accepting that volatility in the form of long term average returns above the norm.

Finally, Standard & Poor's claim it is important to distinguish between strategies and tactics, saying they expect a well-conceived strategy to be flexible enough to accommodate a broad range of market conditions.

Within that strategy, a variety of tactics may be tried to deal with any contingencies that arise and a good management team will adapt to those short term situations without abandoning its basic strategy.