NEW YORK (Reuters) — Bermuda, the island home of the world’s fourth-largest insurance market, may be too small for all its companies, analysts say.Bermuda, where 82 insurers opened up shop in 2006, has prospered over the last two decades as a haven for reinsurers because of low taxes and favourable regulations. Reinsurers take on property-casualty carriers’ most costly risks and either win — or lose — big.

The hammering reinsurers took from Hurricanes Katrina, Rita and Wilma in 2005 only bolstered enthusiasm for this market. In the months afterward about $20 billion in new capital was pledged, largely by hedge fund and private equity investors who saw an opportunity to take advantage of spiking reinsurance rates. Much of the new capital went to more than a dozen major new Bermuda reinsurers.

Those investments proved to be profitable in 2006: Reinsurance rates nearly doubled, there were no hurricanes and Bermuda’s 15 largest insurers earned net income of about $12 billion.

Now, awash with cash, the island industry has to figure out what’s next. The answer may be takeovers — of each other.

“There are too many cooks in the kitchen,” says Bill Bergman, an analyst with Morningstar Inc., “and that has to play out over time.”

Analysts, brokers and chief executives are trying to disentangle prospective buyers from sellers, and also figure out how soon they will jump.

Too early, and a bad 2007 hurricane might leave them short of cash. Too late and someone else might seize the opportunity.

Buyout prospects are being fuelled by companies looking for a new way to sustain growth now that rates have peaked.

The Dow Jones US reinsurance index (.DJUSIU), which is largely made up of Bermuda reinsurers, rose nearly 9 percent last year but has given back more than half those gains in the past three months.

“They must either return capital to stockholders, try new lines of business, or buy someone,” said Vibhu Sharma, chief financial officer of Collins Inc., an insurance broker.

The takeovers have already started. Earlier this month specialty insurer Argonaut Group Inc. moved into the Bermuda market by acquiring PXRE Group , creating a company with a combined market capitalisation of about $1.3 billion. PXRE had put itself up for sale after hurricane losses in 2005.

Another target could be Montpelier Re , because it never fully recovered from losses at the hands of Katrina and her sisters, analysts said. The reinsurer’s shares are trading at about half their pre-Katrina value, cutting its market capitalisation to just shy of $2 billion. The company declined to comment on a possible takeover.

Smaller reinsurers, those with $500 million to $2 billion in capitalisation, are likely to make deals with each other, said David Simmons, who leads the insurance mergers and acquisitions group at Deloitte.

Hedge funds and private equity firms such as former Marsh & McLennan Cos. chief executive Jeffrey Greenberg’s Aquiline Capital backed the latest crop of Bermuda reinsurers, called the “Class of 2005”. Now they may want to see a quick graduation, either through a public offering or a buyout.

Several, including Validus, a reinsurer backed by Greenberg’s Aquiline, have filed for initial public offerings. Castlepoint Holdings Ltd. went public early this week and Flagstone Reinsurance Holdings Ltd. is expected to list its stock shortly.

The most likely to pursue acquisitions or mergers are companies that just reinsure property risk, and may want to diversify before another Katrina comes along.

“If you’re in a single line of business like property, you’ve got to be thinking about alternatives right now,” said Patrick Thiele, chief executive of Partner Re.

Bermuda reinsurers Partner Re, RenaissanceRe and Axis Re are among those rumoured to be possible buyers. Mr. Thiele declined to comment on possible acquisitions, and the others did not immediately return calls for comment.

“Bermuda is a very small island and they all know each other,” said Howard Mills, a former New York state insurance commissioner, who is now with the insurance division of Deloitte. “Deals will be done in coffee shops and country clubs.”