Investors' concerns about companies' propensity to burn through capital at alarming rates has rocked Wall Street and torpedoed efforts by firms to raise private capital.The grim reality of tightening capital markets caught up with Esurance Inc. in late September, forcing the company to sell its business to Folksamerica Holding Company. Inc., a reinsurer based in New York and a subsidiary of Bermuda-based White Mountains Insurance Group.

The decision to sell the San Francisco-based company came after Esurance was rebuked by the lead investor of a third round of venture funding.

Esurance raised $5 million in private financing in May 1999 and $34 million last November, but company executives declined to say how much capital the company had left.

"The volume of new business is eye opening, but we were burning through a lot of capital and that scared off investors who have a five-year timeline for the return on their investment," says Jean-Bernard Duler, Esurance's president.

The company reportedly received a number of offers from carriers before agreeing to be purchased by Folksamerica. Financial terms were not disclosed, but Folksamerica did acquire an 80% stake in Esurance, which will remain in San Francisco and operate as an independent entity of Folksamerica Holding Co.

Steady course

For now, no significant changes are in store for Esurance's business plans. The company is structured as a managing general agent that sells personal auto policies in 24 states on the Web sites of banks, credit card companies and other financial firms, as well as on its own Web site,

The company is licensed to market policies in 48 states and plans to continue to expand its business this year (see "Online Insurance Provides An Ocean Of Opportunity," August).

The acquisition of Esurance comes on the heals of White Mountains Insurance Group's $2.1 billion offer to purchase the U.S. property/casualty operations of London-based CGNU Group.

Folksamerica Holding Company is the parent of Folksamerica Reinsurance Co., a multiline broker market reinsurer with a surplus of $355 million and annual premiums of $500 million.

"The company always has been interested in new opportunities," says Steven Fass, CEO of Folksamerica Holding Co. and the new chairman of Esurance.

"We do not view ourselves as a traditional reinsurance company. We were looking at various Internet companies, and most of them are sizzle. Esurance not only has the technology, it's an effective insurance operation as well," he says.

Future concerns

It's unclear how the acquisition will affect Esurance's relationship with Argonaut Insurance Co. and General Re. Argonaut, based in Los Angeles, last December signed a five-year contract with Esurance and General Re to provide personal auto insurance via the Web.

"In the short term, nothing will happen, but Folksamerica will take a risk-bearing position in the company, but not replace Argonaut or General Re," Fass says.

Industry observers say the deal is a positive development for Esurance. "Folksamerica is not a traditional insurance company. The executives are very open-minded to new approaches and innovation," says Todd Eyler, a senior research analyst for Forrester Research Inc., Cambridge, Mass. "It gives the company access to A+ rated paper, which should take some pressure off."

The fact that Esurance could not survive on its own may not bode well for other Internet-only insurance operations, says Gary Craft, managing general partner of a San Francisco-based firm that conducts research on e-finance companies.

"Esurance spent a lot of money trying to build its brand, and it didn't succeed," Craft says. "It makes a lot of sense for an insurance company to buy it. And I wouldn't be surprised if that happens to other Internet insurance firms. Nobody can raise capital in this market."

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