The wave of new insurers established on the Island since Hurricane Katrina, known as the "Class of 2005", are likely to buy into the Lloyd's of London market in the near future, according to sources quoted by a top British daily.

The Financial Times reported yesterday that the need to diversify lines of business to go beyond catastrophe coverage in the US was one of the factors driving the hunt for acquisitions.

Earlier this month, Bermuda company Validus Re acquired Lloyd's syndicate Talbot Underwriters. And the FT suggested that others, such as CastlePoint Holdings, Ariel Re, Flagstone Reinsurance and Lancashire Holdings might follow suit.

CastlePoint Holdings' chief financial officer Joel Weiner told The Royal Gazette yesterday: "We certainly have no immediate plans to enter Lloyd's, though we may do so in the future.

"We have not said anything to the FT and we haven't published anything to say we would be interested in entering Lloyd's. But we would not rule it out."

Most of the "Class of 2005" were set up to take advantage of the high reinsurance rates after the devastating hurricane season of 2005. The FT suggested ratings agencies were expressing concern about the vulnerability of these companies' balance sheets to a severe hurricane season.

Mr. Weiner said that issue did not apply to CastlePoint, as the company focused on quota share reinsurance and risk pooling across a broad product line, rather than the property catastrophe (P&C) market.

Ironshore, which incorporated late last year and started business as a primary insurer focusing on P&C, was linked with a move into Lloyd's earlier this month. At the time the company's CEO Bob Deutsch called the reports "pure speculation".

However, Ironshore's chief underwriting officer Les Rock indicated in January that the firm will have a London presence at some stage this year.

Large capital surpluses in the hands of many reinsurers, after a year of low claims thanks largely to no hurricanes making landfall in the US in 2006, is another factor persuading Bermuda companies to think about London acquisitions, according to the FT.

"The big fear in mergers and acquisitions (M&A) is whether a company is reserved correctly," the FT quoted a senior market source as saying. "It has been a good four or five years with benign loss environment for the past year at least, so the reserving element of risk has gone away."

Another source told the newspaper that private equity backers of Bermudian start-ups will not relish the thought of capital sitting dormant on companies' books when they are looking for a return on their investment. "I think you will see more of Bermuda," said the source. "I do not think the capital behind the new money will have the patience to set up in Lloyd's from scratch. It is quicker and easier to buy."

Another factor is the insurance cycle, the ups and downs of insurance and reinsurance rates. With rates currently softening (decreasing) in most lines, the cycle has reached a point where M&A activity traditionally increases.

Having a Lloyd's presence would also make it easier for Bermuda companies to extend their global reach, the FT argued. One market veteran was quoted as saying: "You would not picture a Bermudian reinsurer doing much business in China, for example, but that is not the case for Lloyd's vehicles."

Uncertainty surrounding pre-1993 losses that were still weighing down on Lloyd's was reduced dramatically last year, when Warren Buffett's Berkshire Hathaway took on $13.9 billion of business on the books of the Lloyd's run-off vehicle Equitas.

"The Equitas deal has been a big, big issue for buyers. It has wiped off a huge element of risk from Lloyd's insurers books," a source told the FT.

Key targets, according to the FT's market sources, are the smaller, standalone insurers such as listed helicopter insurance specialist Hardy Underwriting, and private equity backed Heritage Underwriting and Canopius. At the smaller end of the scale Novae, Atrium, Cathedral and Argenta could also be attractive targets.