With its vulnerable island location, it would seem only fitting that the Bermuda insurance market took a considerable hit from the record catastrophe losses of 2005.

Willis Re's Bermuda-based Executive Vice President James Kent noted that in the first half of the year, island carriers handed $1.2 billion in capital back to investors in the form of share buy-backs and dividends.

But far greater sums soon were going to claimants instead of shareholders. “The third quarter changed everything,” he said.

The 2005 season produced 26 named storms, including seven major hurricanes. The Bermuda market is expected to pay 25 percent of the expected market loss from the three most destructive storms, Hurricanes Katrina, Rita and Wilma, according to Willis figures.

Mr. Kent said Bermuda's large share of the loss from the 2005 season can be partially attributed to the fact that a significant number of companies do not purchase retrocession protection. “The 2005 losses have not only affected earnings, but also reduced paid-up capital for many companies–especially those with monoline or short-tail portfolios.”

“In addition, the Bermuda market has generally offered more capacity at the mid-to-top end of the property-catastrophe reinsurance programs, which were most unimpaired by the 2004 hurricanes but were severely impacted by Hurricane Katrina,” he said. The market also specializes in the other specialty lines especially hard hit by 2005 losses–marine, energy and property retrocession, he noted.

Investors were more than willing to pour new capital into the island to take advantage of expected price hardening in those lines most impacted by the storm. According to Moody's Investors Service, investors put $6 billion of new capital into 14 existing Bermuda firms and $5 billion into start-ups.

Christopher Klein, London-based head of counterparty risk for Benfield, said Bermuda's regulatory and tax regimes, along with its close proximity to the United States, will always make it a strong contender for U.S. insurance equity investments. “It is quick and relatively easy to incorporate. There is much less bureaucracy,” he said. “You also have a good pool of people [in Bermuda] from which to poach.”

In a report published late last month by Benfield, the short-term nature of Bermuda capital was noted. “A carousel of capital appears to have emerged with short-term risk being capitalized almost, seemingly, on an annual venture basis,” said the report–”Swings and Roundabouts.”

Longtime insurance equity investor Bradley Cooper, of New York-based Capital Z, feels Bermuda will be the place to locate for the foreseeable future.

Right after it became clear 2005 was heading for the insured loss record books, Mr. Cooper helped raise about $1 billion from both private sources and the public market to form Lancashire Insurance Company Ltd., specializing in those lines hardest hit by the storms–energy, marine and retrocession.

This time around regulators are a bit more wary than in previous years. He noted that current property-focused start-ups are facing capital requirements of $1 billion on average, as opposed to around $500 million in previous periods.

“In addition to the higher requirements, the ratings agencies have increased the scrutiny of the proposed deals,” he said.

Rating agencies are paying particular attention to infrastructure, quality of management and board, as well as exposure modeling. They are “also heavily focused on business plans and will not allow companies to deviate from them greatly without risking a ratings downgrade,” he noted.

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