NEW YORK (Reuters) ? Hurricane Katrina, which last year dashed hopes that the insurance industry could post an underwriting profit, may nonetheless have sown the seeds of recovery for one part of the industry: reinsurers.

Katrina, together with later storms Rita and Wilma, ended up costing insurers in excess of $80 billion, Standard & Poor?s estimated in a report.

This year, insurers ? and investors that pumped more than $20 billion into recapitalising companies battered by storm losses and into backing new reinsurance ventures ? are betting on better results. That optimism could fade if this year?s hurricane season, which has started quietly, turned savage.

Regardless of the weather through November 30 when hurricane season officially ends, reinsurers could be this year?s biggest winners, said Robert Hartwig, chief economist at New York-based Insurance Information Institute.

Reinsurers, which provide insurance to other insurers, since January have as much as doubled the rates they charge. ?If there was an exact repeat of (Katrina), it would still be unprofitable for reinsurers; but they are collecting more premiums and requiring more retention, so their financial performance would be better,? Hartwig said.

And reinsurers would likely be in a stronger position than their insurance counterparts ? especially if storm losses proved minimal in 2006.

?Reinsurance is effectively a bet on a very large loss: Reinsurers are betting that it won?t occur, and insurers are betting it will,? Hartwig said. ?The last two years, reinsurers lost the bet, this year they could well win it.?

Reinsurers have raised 2006 rates by 50 to 100 percent and reduced exposure in hurricane-prone areas, Standard & Poor?s said in their report.

That leaves reinsurers badly hit last year, such as Montpelier Re Holdings Ltd. and Renaissance Re Group Holdings Ltd. , in a much better position than a year ago, when capital was severely dented by storm losses.

?By my calculations, reinsurers paid about 45 percent of the losses last year,? said Hartwig. ?Financial results were markedly worse than primary insurers?,? companies that directly sell policies to corporations and individuals.

Montpelier Re shares are up 22 percent over the last three months, making them the second-best-performing insurer for the period behind Covanta Holding Corp. , which is in the waste disposal and energy services businesses.

Renaissance Re is up 8 percent for the same period, while the Dow Jones US Insurance index is up about 1 percent.

Paul Newsome, an analyst with A.G. Edwards & Sons Inc., said reinsurers are in a better position for multiple reasons. ?They are getting more premium per dollar of risk, and they have done other things.? This includes restricting exposure to possible losses region by region, and stepping up capital market transactions that spread more risk to investors.

Investors, largely hedge funds and private equity firms, have put $5 billion into an increasing number of specialised reinsurers, called sidecars, formed in offshore reinsurance centre Bermuda, since last year.

Another $3 billion has been put into catastrophe bonds this year, said Standard & Poor?s. Catastrophe bonds allow insurance risk to be sold to institutional investors in the form of bonds, spreading risk to bond investors instead of traditional reinsurers.

A year ago, many primary insurers cushioned their balance sheets by buying reinsurance to protect against losses. That is more difficult this year, both because reinsurance is more expensive and because less is available. Insurers in some states raised their own rates to account for higher reinsurance costs, but not all are allowed to do so. Some state regulators can veto increases.

But those doing business in the Gulf Coast states have been given some leeway, said Newsome, and are also curtailing how much business they do, especially in coastal areas. The effect of higher prices is also partially offset by state insurers taking on more risk.

Florida, for example, set up a second state insurance body after last year?s storms, to benefit commercial properties that suffer hurricane damage.

State support helps, but demand for reinsurance remains high, causing a supply/demand imbalance, Standard & Poor?s said. ?This has transferred a substantial portion of the risk back to primary companies,? said Standard & Poor?s, in comparison to last year.

Regional insurers, policy sales of which are concentrated in a single geographic area, are seen as the most vulnerable, especially those covering hurricane-prone areas.

These companies could be ?much more exposed to uncovered, or inadequately covered losses (than in) 2005 or 2004.?

The tight insurance and reinsurance market is also forcing more corporations and individuals to retain greater risk, said Newsome. Wal-Mart Stores Inc. is one corporation opting to self-insure commercial coverage now that prices are steeper, said Standard & Poor?s.

And the trend extends beyond the corporate world. ?It is not very hard to find individuals in places like Florida buying (policies) with higher deductibles,? said Newsome.