Reinsurance companies suffered losses last year, but will be buoyed by the gains in the two years following Hurricane Katrina, according to a ratings service analysis.

Courtesy: FEMA

Reinsurance companies in the U.S., Bermuda and internationally lost about 15% of their capacity in 2008 as measured by shareholders’ equity, according to A.M. Best Co.

The ratings service said it believes that two “excellent” operating years in 2006 and 2007, sizable capital increases after Hurricane Katrina and significantly improved loss reserves have enabled the reinsurance industry to withstand the barrage of investment charges and catastrophe losses.

In the wake of record losses from Hurricane Katrina in September 2005, the property-casualty industry tightened its underwriting and collected money from higher premiums, all while experiencing fewer serious catastrophes.

Results from A.M. Best’s stress testing of risk-adjusted capitalization, along with potential near-term underwriting opportunities, shape A.M. Best’s stable rating outlook for the global non-life reinsurance industry.

As expected, effective capital management was critical to reinsurers’ long-term competitive positioning through much of 2008, but this gave way to capital preservation amid major catastrophe losses and the investment markets’ meltdown later in the year.

Despite significant hurdles, the reinsurance industry’s core operations reported sound underwriting results, with the majority of carriers posting profitable combined ratios below 100. Widening of credit spreads, historic stock market losses and defaults on corporate bonds all impacted reinsurers, accounting for the majority of capacity withdrawn from the reinsurance industry, according to A.M. Best’s analysis.

The U.S. reinsurance and Bermuda market absorbed Hurricane Ike, with total insured losses nearing $20 billion, but still posted a 2008 combined ratio of 93.6, which A.M. Best called “profitable,” up 6.9 points from 86.7 in 2007.

A key driver of 2008 underwriting results was loss reserve releases, which shaved about seven points off the U.S. reinsurance and Bermuda market segment’s loss ratio.