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Bermuda Insurers Soak Up the Sun

Diane Hess

Shares of Bermuda-based insurer Axis Capital Holdings (AXS Quote) were rising 14% on their debut of trading Tuesday.

Axis Capital sold 21.5 million shares at $22 a share, above its expected price range, for $473 million. The shares represent 15% of the company's equity. Morgan Stanley and Citigroup co-managed the deal.

During the first quarter of this year, Axis earned $107 million. It is the latest reinsurer to go public, on the heels of Montpelier Re (MRH Quote) and Endurance Holdings (ENH Quote).

Axis is one of almost 100 Bermuda insurance startups formed in the year after Sept. 11, according to Fitch Ratings. During that time, there was a surge in demand for insurance and many existing companies were saddled with liabilities. "If you didn't have the legacy issues -- asbestos liability or deficient reserves -- it was very easy to make money in insurance," said Donald Thorpe, a director at Fitch Ratings.

It still is easy. Since Sept. 11, policy pricing has been firm. The start-up insurers have profited. But the challenge for them is going to be whether they perform well in a less favorable environment, experts say. "When prices start to soften, insurers cannot automatically make money," said Thorpe.

The start-ups have yet to prove themselves in more challenging times. "They have not demonstrated that they can go through the soft phase as well as the hard," said Thorpe. "Axis has some experienced people. I am not saying they cannot do it. But the question is how they will perform through the full cycle."

In the meantime, the Axis IPO is the third in less than a week, following real estate investment trusts American Financial Realty Trust (AFR Quote) and Maguire Properties (MPG Quote) last Wednesday.

The deal further raises hope for a rebound in the IPO market. Though it is still on track for another very slow year, an offering from Molina Healthcare is expected to price this week. Digital Theater Systems, Chunghwa Telecom, Direct General, Integrated Alarm, Netgear and White House, Inc. also have pricings in the pipeline for July.

Unlike the IPOs of the 1990s, the new deals represent a variety of sectors -- not just technology.

In almost all of the recent offerings, the common denominator is profitability, however. "IPO investors are very much tied to tangible performance these days," said David Menlow, president of IPOFinancial.com. "They are not looking for perceived value. They are looking for stated value."

Moreover, investors in new issues no longer expect roaring first days, which characterized the late 1990s. "The deals are opening up with premiums, but they are not running away," said Menlow.