Fitch Issues 'Storm Warning' for Reinsurers

Life has been jolly good for the Bermuda reinsurers who provide billions of dollars to back up property insurers just in case hurricanes come crashing ashore in the U.S.

A recent brush with Hurricane Bill washed away a few inches of sand on that island's beaches, but otherwise caused very little damage. As already reported by BNET Finance, earnings have been decent and there seems to be little in the way of hurricane activity looming across the Atlantic. The storm season is more than half over and the worst of it, when waters in the Caribbean are at their warmest, has already gone by.

Enter Fitch Ratings with its own tropical blast. "Reinsurers may struggle to replenish capital if they suffer large catastrophe losses in the current financial market," says the rating agency in its 2009-2010 Global Reinsurance Review and Outlook. And Fitch maintains its negative rating outlook on the whole sector. Of course, you can't really blame a rating agency for being cautious after their black eye in 2008 when raters failed to notice the vulnerability of the mortgage market.

Still, Fitch seems like a teetotaler at a fraternity party. It admits that reinsurers performed better in the last 12 months than primary insurers, companies like Hartford Financial and Allstate. It also believes the reinsurance sector will be one of the first insurance sectors to return to a stable ratings outlook.

So what's the beef with Bermuda? Fitch says insurers' access to capital markets may be restricted if a big storm hits. This would seem to single out smaller reinsurers like XL Capital and RenaissanceRe, Endurance Speciality and PartnerRe, because their larger European counterparts, like Munich Re and Swiss Re, aren't short of money.

But Bermuda reinsurers have little trouble getting money from hedge funds and private equity, even after the 2005 season when hurricanes Katrina, Rita and Wilma caused nearly $80 billion in damage. Disasters tend to create a new crop of reinsurers in Bermuda's business-friendly capital of Hamilton. And the cash cows willingly sink money into the reinsurers because they represent a different kind of risk than stocks and bonds and thus provide diversification.

Another positive sign that Fitch may not have noticed is that "catastrophe bonds," hurt by the fall of Lehman Brothers, have returned. Catastrophe bonds, like reinsurance, provide fallback protection against hurricanes and earthquakes. The health of this market also indicates that Bermuda reinsurers would have no trouble getting money if needed.