Bermuda reinsurers make up 36 percent of the global reinsurance market based on property/casualty net premiums earned, according to credit rating agency AM Best Co.

Best’s special report on global reinsurance also found that non-US domiciled re/insurance companies, particularly those in Bermuda, faced uncertainty over US tax legislation and other potential policy initiatives, such as legislative proposals for subsidised federal reinsurance, the threat of which was very real.

The report revealed that capacity had returned in force to the global reinsurance market in 2009 as solid earnings helped boost capital levels by 24 percent on the previous year, despite a softening market.

It said that the market had recovered from the impact of the global financial crisis and catastrophe losses, with earnings turning around sharply last year, allied to moderate catastrophe losses, favourable loss-reserve development and a significant rise in asset values.

Furthermore, US reinsurance and Bermuda market companies reported a solid combined ratio of 85.8 percent in 2009 compared to 93.6 percent in 2008, while January 1, 2010 renewals were mostly in order as the perception of excess reinsurance capacity limited opportunities for rate increases to a few loss-exposed lines.

However the report said that the global reinsurance segment had struggled to maintain its top line over the past year and that trend was set to continue given the reduction in premium volume in the primary market. Cedants have responded to the economic pressures by continuing to increase retentions as exposures decline, while reinsurers have maintained pricing discipline so far, it added.

Despite this, the report found that underwriting margins were being squeezed by deteriorating rates and increasing loss costs for most classes of business and territories, which were eroding the underlying accident-year performance.

Meanwhile proposed US tax legislation and other policies have been debated in the US Congress for some time and could soon take centre stage, the report concluded.

“Reinsurers rightfully have taken a defensive position against all of the headwinds they face,” the report read.

“Bermudian re/insurance companies are lobbying to propose different market solutions for Congress to contemplate.

“In addition, on the underwriting side, 2009 brought a meaningful shift in reinsurers’ underwriting portfolios toward short-tailed property and casualty classes.

“It is apparent that reinsurance pricing is holding better than primary pricing, as many reinsurers have demonstrated the discipline to walk away from underpriced business, particularly longer-tail US casualty risks.

“Moreover, 2009 is considered somewhat of a disappointment in terms of pricing, as expectations for a broader scale recovery were not met, and the reality is the industry could be in a prolonged softening market unless a mega-event causes tens of billions of dollars of insured losses.”

In the US reinsurance and Bermuda market, net premiums written for property/casualty business was down slightly for 2009 at $50.3 billion from $51.6 billion in 2008, but net investment income was up at $8.2 billion versus $7.6 billion over the same period, as was net income at $12.4 billion last year compared to a loss of $500 million the previous year.

Shareholders equity advanced to $88.4 billion from $67.6 billion, while the loss and expense ratios were down at 56.1 percent and 29.7 percent respectively year-on-year, largely down to an absence in material catastrophic loss activity and a quiet hurricane season.

Among the other highlights of the report were XL Capital’s remarketing of $745 million in aggregate principal amount of senior notes as the company continued to deleverage and derisk its balance sheet and a number of M&A transactions, including Validus’ takeover of IPC, Partner Re’s acquisition of Paris Re, and Harbor Point and Max Capital’s plans to merge, which were announced earlier this year.

In terms of return, the US reinsurance and Bermuda market yielded a 16 percent return on equity during 2009, bouncing back from — 0.7 percent in 2008, however, excluding favourable loss-reserve development from reported current-year earnings, that figure would have been approximately 12 percent.

Best expects the US reinsurance and Bermuda market to continue producing positive returns in low double digits, reflecting disciplined underwriting, more modest reserve releases and prudent capital management.

The US reinsurance and Bermuda market comprised 57 percent of shareholder equity compared to 43 percent by the ‘Big 4’ European companies (Munich Re, Swiss Re, Hannover Re and SCOR).

Best said it maintained a stable outlook for the global reinsurance market, holding the view that most rating actions on reinsurers would be affirmations, with only a modest number of changes anticipated.

“The outlook reflects AM Best’s views that the reinsurance segment maintains strong capitalisation in total, although capital strength can vary among reinsurers,” the report said.

“Considering the turmoil that has occurred within the financial services industry, the global reinsurance market has weathered the financial storm in good standing.

“Factors that could change the segment’s outlook to negative include the sector’s ability to effectively manage capital in both the short and long-term; further erosion in pricing with a particular focus on longer tailed casualty business; and the potential for looming inflation to impact loss reserves.

“From an earnings perspective, AM Best expects 2010 to be a positive operating year, though results depend on catastrophe losses.

“In the longer term, AM Best believes the reinsurance segment’s earnings will come under increasing pressure as reserve redundancies evaporate and the current pricing environment translates into calender-year results.”