The difficulty of obtaining work permits, new taxes on international business and a growing strain on Bermuda's infrastructure by the Class of 2005 and an influx of hedge fund operators have all contributed to making life more uncertain for the Island's reinsurance industry.

That is according to AM Best Co.'s report entitled "Global Reinsurance - Market Review", which also warns that the advantages of Bermuda and other "tax havens" continues to draw scrutiny from the US.

But the rating agency's report also reveals that the Island's reinsurers are established players in the market, with the classes of 2001 and 2005 having a big influence on the global sector.

The study warns that broader conditions in Bermuda are uncertain, with the class of 2005 and an increase in the number of hedge fund companies adding to the strain on the Island's infrastructure, especially office space, housing for key personnel brought to the Island from abroad; and even necessities for their families such as slots in schools.

Obtaining work permits has become more difficult, and Government is considering measures like new limits on non-Bermudian staff and requirements on companies to train locals for more of the positions currently held by ex-patriates.

There is also talk of new taxes on international business, which would erode one of the critical advantages that has made Bermuda a world-renowned financial hub, according to the report.

The report claims that the issue of US scrutiny of the Island's reinsurance market centres on whether the federal government will revise its stance on allowing foreign-based insurers with US affiliates to move much of their taxable income by reinsuring the business offshore to an affiliate located in a tax-advantageous country, thereby avoiding federal income tax.

The study also shows that members of the Island's class of 2005 broke into its top 35 global reinsurance groups for the first time.

Validus, which came in at number 28, was helped by the takeover of Lloyd's of London insurance company Talbot in 2007 - a purchase which added more than $285 million to Validus' premium volume.

Flagstone Re furthermore made the list on the strength of an acquisition and with the help of Allied World Assurance's fall from the rankings, although the latter has launched a new US platform which could propel it back into the top 35.

Of the 2001 start-ups, Max Capital joined the top 35 last year mainly because gross premiums written increased through seven life reinsurance transactions and the inclusion of its newly-acquired surplus lines business.

Other highlights of the report include the fact that 2007 proved to be banner year for property and casualty risk transfer into the capital markets, as issuance of insurance-linked securities topped $7.3 billion, up by more than 55 percent over what had been a record $4.7 billion of bonds issued the previous year. Among the main deals during this year were the $120 million transaction of Blue Coast Ltd. in July, which was sponsored by Allianz Risk Transfer (Bermuda) ltd., providing Allianz with a three-year protection from hurricanes in eight US coastal states, including Florida, and Globe Re, a $133 million transaction backed by Hannover Re and the year's only dedicated sidecar in June.

Meanwhile Flagstone Reinsurance Holdings Ltd. sponsored the $104 million transaction of Valais Re Ltd., enabling it to access retrocessional aggregate and per-occurrence indemnity coverage for three years, providing the reinsurer with a greater level of price certainty over the cycle.

The symbiotic relationship between Bermuda and Lloyd's and other major markets was also illustrated in the findings, with capital following opportunity from London to Bermuda to Switzerland to Dubai, while traditional London market players have operations on the Island, conversely Bermuda stalwarts and start-ups have launched or acquired syndicates at Lloyd's, where attractive ratings and global licences ease the pain of the market's relatively high expense structure.

In July, for example, Max Capital announced the take over of Lloyd's insurer Imagine Group (UK) Ltd., while further afield Flagstone found a South African reinsurance firm as a way into African and Middle Eastern business, as well as the use of a Cyprus-based reinsurer to get into the Mediterranean region.

Elsewhere, the replenishment of capital to the market has seen much of the new investment being put into lightly staffed companies that focus on underwriting, leaving brokers to prospect for the business, which has proved to be the model for many of the businesses that launched, often in Bermuda, after watershed catastrophes such as Hurricane Andrew, the 9/11 terrorist attacks and the 2005 hurricane season, the report revealed.

In addition, a number of the Island's reinsurers have moved to expand their pension-related business, starting with pure mortality and longevity risk, but also venturing into elements of investment risk with some deals, with Scottish Re citing the benefits of lowering its longevity risk.

Another factor impacting Bermuda's reinsurance industry is the legislation, regulation and taxation of the US reinsurance sector, with several moves still under consideration profoundly influencing how the two countries' markets operate and interact.

Market conditions for the Bermuda segment mirror the competitive themes of its US counterpart, as profitability trends prove similar in direction but more pronounced in absolute terms, given the strong results by the Island's companies.

As the Bermuda insurance market continues to grow, said the study, the Bermuda Monetary Authority has also expanded in terms of its role within the global financial system and as a result its standards of regulation have been subject to increased scrutiny by regulators around the world, as well as key stakeholders such as investors and policyholders.