Bermuda-based reinsurers have largely replenished capital lost to hurricanes in 2005, according to a newly released report on the first nine months of the Bermuda market.

The Benfield Bermuda Quarterly report by London-based broker Benfield Group Ltd. said that while surplus profits were returned to shareholders in the first half of 2005, just a few months later capital was revolving ?carousel-like? back into Bermuda.

This money would replenish balance sheets and provide extra capacity to established and new companies aiming to exploit the expected hardening of the market.

Benfield noted that the capital of the 16 Bermuda reinsurers that it tracks was reduced by $3.6 billion to $41.4 billion in the first nine months of 2005, however ?recapitalisation has been swift with $9.3 billion of new capital raised by mid-December to replenish balance sheets?.

The new capital is equivalent to 20 percent of the group?s capital at June 30, 2005 and 18 percent of third quarter 2005 catastrophe losses, the report said.

?Although not all of the Bermuda Benfield group has raised new capital, the overall equilibrium between capital lost to the storms and the subsequent new flows of capital suggest that investors are willing to stand much closer to the underwriting action than has traditionally been the case.

?The return of capital to shareholders earlier in the year reinforces this point. A carousel of capital appears to have emerged with short-term risk being capitalised almost, seemingly, on an annual venture basis,? Benfield said.

Only four companies reported a profit with the overall group reporting a net loss of $1.4 billion for the first nine months of 2005 compared with a profit of $3.4 billion in the same period 2004.

Investment income was important in containing the loss, contributing $3.78 billion, up 41 percent on 2004. Net realised gains were also up by 14 percent, the report said.

The three catastrophe monoline companies were hardest hit by the hurricanes with combined ratios higher than 200 percent while the group average combined ratio increased from 96.8 percent to 116.7 percent.

The exceptionally high losses prompted most companies to recognise that a ?serious failure of the risk management and underwriting processes had occurred,? Benfield said.

The outlook for 2005 earnings is ?gloomy? said Benfield with Hurricane Wilma causing an estimated damage of $8-$12 billion.

However the outlook for the January 2006 renewal is ?upbeat with substantial price increases expected on loss-affected treaties and la least a stabilisation of terms elsewhere?, the report said. Rating agencies have also been quick to react to the impact of the hurricanes by downgrading a number of companies on concerns about diminished capitalisation and risk management.

A.M Best and Fitch Ratings also announced changes to their capital models for reinsurers in light of third quarter hurricanes following similar action by S&P in June 2005. ?The fundamental impact of these changes will be to increase the amount of capital required to support catastrophe underwriting, which will make the achievement of attractive returns at current prices difficult, particularly for the mono-line companies,? Benfield said.

Benfield expects the new methodologies at the rating agencies will also impact the 2005 start-ups who saw Bermuda as ?the preferred destination? and were attracted by the prospects of increased prices and capacity shortages.

An expected combined capital base of $7-9 billion is coming from private equity funds, hedge funds, public subscription and existing corporate financial resources. The more stringent capital requirements will challenge the new companies ability to ?generate attractive returns and most business plans indicate projected returns on equity in the range of 12-19 percent compared to 20-25 percent targeted by many of the new entrants post 9/11,? the report said.

The report noted that in several cases prospective investors are re-entering the market having invested in and subsequently realised gains made from the 2001 wave of start-ups. This is a feature that ?appears to support the capital carousel?.

Benfield that many of the new companies face challenges if they are to be open for business on January 1, 2006.

These include capital raising as well as infrastructure and staff.