Many happy returns? investors are delighted to ride the Bermuda gravy train for now, but experience shows they'll eventually look to get off. One option is to go public. (Bermuda Start-ups: Industry Strategies).

Sept. 11 wasn't Hurricane Andrew, and 2002 isn't 1993. Those facts might seem obvious, but they're easy to miss when looking at Bermuda's latest insurance boom and where it might lead.

It's tempting to compare the two watershed events--the biggest insured loss in history and the costliest hurricane ever--and to look for similar Outcomes as the new Bermuda companies sort themselves into long-term investments and short-lived acquisition targets. But to those who witnessed both cycles firsthand, the differences are vast.

Andrew all but redefined the term "probable maximum loss" for property insurers when it scoured southern Florida in 1992. But its impact, while profound, was relatively narrow, crimping capacity for property catastrophe coverage as it left other lines relatively unscathed. Sept. 11, followed by the failure of energy trader Enron Corp., cut across an unprecedented swath of lines--property and liability, primary coverage and reinsurance.

The smartest of the new Bermuda players grasp that reality and stand the best chance of being around for the long haul, according to venture capitalists who have been through the past two rounds of action on the island.

Bermuda start-ups of the past 10 years don't have a track record for longevity. Out of the group that emerged from Andrew, the most prominent survivors are RenaissanceRe Holdings Ltd., the highly successful property catastrophe reinsurer, and PartnerRe Ltd., which has grown and diversified far beyond its origins as a catastrophe specialist. Many others are all but forgotten, most often absorbed by larger, more established players. A quieter success story has been IPC Holdings Ltd., which also remains independent, writing a portfolio that is primarily catastrophe excess-of-loss business.

The common thread for most of those companies, whether they survived or vanished, is that sooner or later, the original investors got at least some of their money out--through an initial public offering or a sale. Many went public at or soon after their launch. One question looming ahead for the newcomers is the same as it was for the post-Andrew group: How long will the investors stay in, and what's their exit strategy?

Plans and Disappointments

Two of the newcomers have at least partial answers already. Montpelier Re Holdings Ltd. filed a registration statement with the Securities and Exchange Commission on May 30 for an initial public offering, seeking to raise as much as $250 million. But none of the original investors will be selling shares, and the offering is a pure capital raising, with the net proceeds earmarked to increase the capital and surplus of Montpelier Re and boost its underwriting capacity. Tom Kemp, Montpelier Re Holdings' chief financial officer, noted that many of the new Bermuda companies were launched with private capital purely for the sake of speed, enabling them to be operational Jan. 1.

Arch Reinsurance Ltd. was distinct among the newcomers for having a publicly traded parent already--Arch Capital Group Ltd. Arch Capital was the reincarnation of Risk Capital Holdings Inc., which changed its name to Arch in May 2000 when it sold Risk Capital Reinsurance Co. to Folksamerica Reinsurance Co. A year before Sept. 11, the company announced plans to relocate to Bermuda, and in October, it arranged a $750 million infusion from investors to re-establish itself in the post-Sept. 11 reinsurance market. Now, Arch has a war chest at the ready if an attractive acquisition opportunity presents itself.

"We have a currency to be a consolidator," said Jack Bunce, a managing director with Hellman & Friedman, which participated in Arch's launch. "I certainly don't see anything in terms of selling Out in the near future."

Other companies might not be able to say the same. The new players, perhaps expecting to feast on the sharp turn in the property/casualty underwriting cycle, found it tough going for the Jan. I renewal season, Bunce said. Established companies "had sharp elbows out" to keep the newcomers from stealing their business, and a handful of start-ups that were most bruised might be the first targets for consolidation, although not immediately, he said. First, they have to overcome "denial" of the truth -- that their investment of time and energy isn't going to produce the hoped-for results--and "that process takes a little time," Bunce said. He wouldn't predict any consolidation this year but said he would be "less surprised to see it next year"

Among the most disappointed were companies that instinctively bet on the property catastrophe market--where the action was in 1993 after Andrew Ultimately, that market wasn't as stressed as many in the industry had feared, leaving less room than expected for new companies, Bunce said.

The July 1 renewals will be a more telling indicator, however, because the new companies weren't necessarily ready for Jan. 1, said Elizabeth Farrell, vice president of global financial services at A.M. Best Co. Also, many existing reinsurers benefited at Jan. 1 from "payback" mechanisms, both implicit and explicit, that provided them access to business on more favorable terms not available to start-up companies.

Farrell also noted that while most of the start-ups pointed to property catastrophe business as an initial focus, "subsequently, most of the business plans that were presented did anticipate some diversity." She said many of the companies were expecting some level of concern over the security of the London market.

Knowing When to Leave

As to when investors will look to reap their rewards and move on, strategies will vary, but Bunce didn't recommend trying to time an exit strategy to movements in the underwriting cycle, calling it "a really risky way to go." The stock market, he noted, "is betting daily" on when the cycle will turn downward again.

Arch is focusing on building its underwriting prowess, and if it succeeds, the investment "will take care of itself," Bunce said. He spoke from experience, having seen one of the post- Andrew start-ups--Mid Ocean Ltd.--grow into a tempting acquisition target that eventually was snapped up by its longtime shareholder and partner, XL Capital Ltd. Selling Mid Ocean wasn't in the plans when XL came forward, but by then the hard market was "mature," Bunce said. XL was looking for more expertise in Mid Ocean's specialty and made an attractive offer, he said.

Right now, the industry is at an earlier point in the cycle, and companies see plenty of opportunity to grow organically without resorting to acquisitions. Once the climate changes, investors looking to sell out will find that their return depends in part on how much of the capital actually is deployed to underwriting, Bunce said. The capital being used will command a "decent multiple" in an acquisition, while there will be little premium for idle capital, he predicted.

Another scenario, Farrell noted, could be mergers among start-up companies. As for established players, she said, they're avoiding the distraction of pursuing acquisitions and are "keeping their eye on the ball at this point."

When the time is right, acquirers will come looking for good client relationships, good books of business and underwriting talent, Bunce said. "It really comes down to underwriting talent from the investor's perspective," he said. "That's really kind of criteria one through 10 for us."

The needs might be fewer, however, said Kewsong Lee, a managing director with Warburg Pincus. The reason is that when the early '90s crop of companies went up for sale, the acquirers had gaps in their capabilities that an acquisition could fill. For investors this time around, exiting through an acquisition "may be more difficult, because companies already have built up their capabilities," Lee said.

A handful of start-ups--which Bunce and Lee are betting will include Arch--could follow in the footsteps of RenaissanceRe, which Warburg had a hand in launching. "As the lessons of the last cycle show," Lee said, "there always will be one or two firms which are strong, permanent, enduring companies...on a stand-alone basis."

RELATED ARTICLE: Where Are They Now?

The following reinsureres were established in Bermuda after Hurricane Andrew. Their experience may foreshadow the future for the new start-ups.

Centre Cat Ltd. (later Cat Ltd.)

Established: September 1993

M&A: Sold to Ace Ltd., April 1998

Current: Integrated with Ace Tempest Reinsurance Ltd., a unit of Ace

Global Capital Reinsurance Ltd.

Established: October 1993

M&A: Sold to Exel Ltd. (later renamed XL Capital Ltd.), June 1997

Current: Absorbed into XL Re Ltd.

IPC Holdings Ltd.

Established: July 1993

IPO: March 1996

Current: Stand-alone, publicly traded catastrophe excess-of-loss insurer

LaSalle Re Ltd.

Established: October 1993

IPO: November 1995

Current: Placed in runoff, May 2002

M&A Merged with Trenwick Group Inc., October 2000

Mid Ocean Ltd.

Established: November 1992

IPO: August 1993

M&A: Sold to Exel Ltd. (later renamed XL Capital Ltd.), 1998

Current: Absorbed into XL Re Ltd.

PartnerRe Ltd.

Established: November 1993

IPO: November 1993

M&A: Acquired SAFR (1997), Winterthur Re (1998)

Current: Stand-alone, publicly traded, multiline reinsurer

RenaissanceRe Holdings Ltd.

Established: June 1993

IPO: July 1995

Current: Stand-alone, publicly traded catastrophe reinsurer

Tempest Reinsurance Co. Ltd.

Established: September 1993

M&A: Sold to Ace Ltd., July 1996

Current: Now Ace Tempest Reinsurance Ltd., a unit of Ace