Now that the hurricane season is officially over, the prospect of bumper profits and excess capital courtesy of 2006 is looking more and more likely as we near the year end.
Save any adverse claims experience, the vast majority of Lloyd's bosses will be pondering what to do with their new found wealth while enjoying the delights of a mince pie and mulled wine.
In short, the capital gain from an "unprecedented" underwriting year, which couldn't be further removed from its predecessor, is likely to go any one of four ways according to experts.
The more cautious analysts are expected to acknowledge the fundamental change in attitude towards catastrophe risk and boost their reserves, so they can gradually release it over future years to stabilise balance sheet strength.
At the other extreme, industry observers believe some, perhaps more likely to be Bermudan insurers, will choose to plough their profits into diversification.
Recent M&A activity within the Lloyd's market seems to have opened up people's minds to the possibilities of achieving a diverse business by linking companies together.
Some analysts believe those inspired to follow in the footsteps of Catlin and Wellington, and Canopius and Creechurch, will come from the middle market and not from the top echelon of managing agents.
"With the gulf widening between the top managing agents and the smaller cap companies at Lloyd's like Chaucer, Atrium and Hardy, those smaller cap companies could lookto merge together in an attempt to close the gap," suggests one industry source.
On the issue of diversifying portfolios, Fitch Ratings' senior director of insurance, Chris Waterman, sounds an encouraging but cautious bell.
"Concentrated insurers that diversify simply to benefit from rating agency and regulatory capital treatment are unlikely to see material benefits from this strategy in the early years, and in fact, could experience ratings downgrades," explains Waterman. "The operational risks associated with an unfocused and/or poorly controlled diversification strategy are likely to far outweigh the diversification benefits that a company can otherwise achieve."
For those opting out of the spending or saving model, the rewards of 2006 may be used in capital repatriation or for the remainder, straight back into the pockets of their faithful shareholders in the form of healthier dividends.
At the beginning of 2006, the market was split into two schools of thought: those who said, 'what the hell, let's write more cat risk'; and those who took the more cautious approach by reducing their aggregates in cat exposed areas and dipped into or increased activity on less volatile business lines.
Bar unexpected liabilities, the mavericks have won. Now, with the face of catastrophe reinsurance shifting for the foreseeable future, and rates unlikely to dramatically drop off with demand still outstripping supply, it may encourage more insurers to dip their toes into the potentially cash-laden market in the following 12 months.
The only real question now is whether the wind will blow in earnest again in 2007? IT
