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Don't Mock the Knee Sock: Bermuda Insurers Getting Rich

The rule of thumb in Las Vegas: bet with the house if you want to win. This seems to hold true for insurance companies this year, at least for Burmuda-based reinsurers.

Just look at the earnings for RenaissanceRe, Endurance Specialty, Montpelier Re and PartnerRe ("Re" is short for reinsurance). They all did just fine. Even newer and smaller competitors such as Validus showed good second quarter numbers.

But what do all these insurers have in common? They are based in balmy Bermuda, where bankers sport Bermuda shorts, knee socks and blazers for their time-shortened commutes to work. They are also largely owned by hedge funds, which generally capitalize them with very smart money.

These reinsurers are essentially huge pools of largely untaxed capital that stays offshore in case there's a big natural disaster. Property insurers like Allstate and Travelers get insurance from them in case this natural disaster occurs. In other words, you insure your property with Allstate and Allstate insures its policies with reinsurers.

But there was one notable exception. In 2005 Allstate didn't reinsure its policies in Louisiana. Big mistake. When Hurricane Katrina hit Allstate lost more than $3 billion. Now insurers make sure they are covered, often buying from Bermuda-based companies, although European giants like Munich Re also offer these types of policies.

This has been a lean year for catastrophes, but one never knows what's brewing in the Atlantic. Right now it appears that the U.S. might escape the worst of the hurricane season. And in that case, the reinsurers, and the hedge funds that back them, will make even more money as the year progresses.

So it just might be a good year to put on those Bermuda shorts, hike up those knee socks, slap on that blazer and bet with the house.