Bermuda reinsurers seen as getting stronger.

It's been rough sailing out of Bermuda for the island's small and specialty property/casualty reinsurers, thanks to record-breaking hurricane losses.

And no sooner did the skies clear over the U.S. Gulf Coast than other monsters sailed over the horizon-titanic Swiss Re Group became the world's largest reinsurer by claiming GE Insurance Solutions. And the British are coming--Lloyd's heavyweights Amlin plc and Hiscox plc, among others, claimed some of Bermuda's reinsurance action for themselves as well.

What's a small reinsurer to do in stormy times? Stay the course and all will be well, industry watchers say.

Bert Golinski, managing director of the Bermuda property practice at reinsurance broker Guy Carpenter & Co., said "quite a bit of money" has been raised in the past two months by Bermuda reinsurers, most of which raised $300 million or more. "For most of them, the capital raising has put them back at par or slightly better than where they were before the storms this year," he said.

Most Bermuda reinsurers, including smaller specialty writers, are "of sufficient size" that they are not necessarily put at a disadvantage either by a big catastrophe loss or by giants like Swiss Re becoming even bigger, said Rod Thaler, U.S. national director of Willis Group's Willis Re property and casualty division. In the aftermath of this year's record-breaking hurricane losses, reinsurers are finding that clients are assessing not their overall size, but rather their risk-allocation strategies. "If there is a concern about the size of the capital base of a reinsurer, you may see it reflected by clients moderating the size of the lines they'll accept from a given reinsurer, especially if they've just suffered losses," said Thaler.

In many cases, the reinsurer will still owe the cedant recoverables from this year's disasters going into next year, he said. That too will be a consideration for the cedant when deciding how much protection to buy from a reinsurer.

Thaler said some smaller reinsurers that hadn't adequately recapitalized could still conceivably be "taken out," depending on how losses from hurricanes Rita and Wilma shake out, but moderation in capital allocation strategies is more likely the limit of the response of those smaller companies to such losses.

The property/casualty reinsurance market will harden in 2006, but Thaler believes hardening will start off slowly and accelerate six months or so later.

Swiss Re's headline-grabbing acquisition of GE Insurance Solutions is a big deal for Swiss Re, but smaller reinsurers will likely just shrug it off, said Thaler. "Bigger isn't necessarily better," he said. "Swiss Re feels it's good to be big at a time of market hardening, getting a lot more penetration into certain segments of the market."

There will "inevitably" be more consolidation elsewhere in the reinsurance market, said Thaler. "The only question is whether it will be sooner or later," he said.

Golinski hesitates to even describe Bermuda's specialty and property/casualty reinsurers--companies such as PXRE, Max Re, Axis Capital and Everest Re--as "small," noting that they tend to be capitalized at $1 billion or more. "They're actually pretty good-sized companies, and most of them are recapitalized in one form or another," he said. "They're ready to go."

Perceptions about specialty reinsurers, particularly catastrophe specialists, tend to change with market events, said Golinski. "Before the storms of 2004, being a property cat specialist was seen as a good thing, according to the market," he said. "Now we've had a few catastrophes and all of a sudden everyone wants to go back to diversification as a good thing."

But Golinski reminds that the perceived strength of Bermuda's property catastrophe specialists was that they were free of the legacy issues burdening reinsurers with a wider range, particularly prior-year development in casualty lines and asbestos.

"You can argue it both ways, but I think the bottom line is that there is room in the market for both, as long as you have the expertise and the capital to back up your promises," he said.

New Capital--Post Katrina/Rita/Wilma

Major Catastrophe Relative to u.s. P/C industry Capital

                                        Existing
                          Insured       PHS
Catastrophe        Year   Loss          (Capital)

Hurricane Andrew   1992   $15.5B        $163.1B
9/11 WTC Attacks   2001   $30.0B        $295.4B
K/R/W Hurricanes   2005   $69.0B est.   4412.5B

                   Loss
                   as % of   New Capital Raised
Catastrophe        Capital   ... and as % of Loss

Hurricane Andrew   9.5%      $5.0B = 32%
9/11 WTC Attacks   10.2%     $13.813 = 46%
K/R/W Hurricanes   16.7%     $14.0B = 20.1

Source: Insurance Information Institute; Friedman Billings
Ramsey; Banc of America Securities, Willis Bermuda