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More startups needed? Observers raise doubts

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Business is booming for the so-called Class of 2005 reinsurers that formed in Bermuda in the wake of last year's U.S. hurricanes, but industry observers expect little near-term activity from new entrants or mergers and acquisitions.

Jamie Veghte, Stamford, Conn.-based chief executive of reinsurance general operations for Bermuda-based XL Capital Ltd., said, "I've heard rumblings that there may be as many as three new ones being formed."

He added, "Frankly, I'm not sure that there's a massive need for any additional reinsurers, but I'm sure the investment groups who are forming them have their own strategy and rationale for doing it."

Michael D. O'Halleran, chairman and CEO of Chicago-based reinsurance intermediary Aon Re Global, a unit of Aon Corp., said some new reinsurers may form by the end of the year, but "I think there won't be many because I think the marketplace demand for the new capacity will be relatively specialized, as opposed to broad-based."

Mr. O'Halleran pointed to the formation of sidecars, which are special-purpose reinsurance vehicles. "Certainly, when you look at what the impact of some of these sidecars have done in terms of their new capacity in the market, it's a fairly efficient form for existing players to be able to broaden their base of business without taking an undue amount of additional exposure," he said. "But in effect, it's not creating a new company. It's writing off the back of existing carriers."

Mark Rouck, senior director at Fitch Ratings in Chicago, said he sees few new sidecars being formed this year or next. "I think if capital comes in, it'll come into the entities that have already been formed," he said.

Even if new capital comes into the market, "it won't have a huge influence on the marketplace" because of the "capital required, and the diversification and scope required" to write a significant amount of property cat business, said Pierre Ozendo, Armonk, N.Y.-based CEO of Swiss Reinsurance Corp.'s Americas division.

There has been limited M&A activity this year.

Last month, Zug, Switzerland-based Converium Holding Ltd. said it had reached a $295 million deal to sell its U.S. operations, which are in runoff, to a unit of Berkshire Hathaway Inc.

XL's Mr. Veghte cited Swiss Re's acquisition earlier this year of GE Insurance Solutions from General Electric Co. "I don't know whether that necessarily represents a lead indicator that a lot more of this is yet to come," Mr. Veghte said.

"I think as the market softens, and it gets more and more difficult from a competitive standpoint, that might be the conditions under which you'd have an increase in M&A activity," said Mr. Rouck, who said those conditions are not likely to emerge in the short term.

"Picking up smaller companies would not necessarily bring huge value," said Mr. Ozendo.

Citing Bermuda reinsurers formed in 2001 and 2002, Chris O'Kane, London-based CEO of Aspen Insurance Holdings Ltd., said, "I think most people in that class feel that they've reached critical mass—that they don't need to be taken over."

However, William J. Adamson, CEO of reinsurance intermediary Carvill America Inc. in Chicago, said, "I think the prospects for M&A activity are probably increasing, simply because a lot of the new entities were brought into focus initially on shortages in the (property/casualty) arena" plus rating agency pressure to either "build or buy."

"I see there is going to be a growing interest in acquisitions by some of the new companies to obtain a broader diversification," Mr. Adamson said.