First, Warren Buffett turns over the bulk of his vast wealth over to Bill and Melinda Gates, and now he’s bailing out all those beleaguered Lloyd’s Names that suffered one of the great financial fiascos in England’s history. What a charitable fellow!

At least that’s the tenor of the coverage given the deal struck on Friday between Mr. Buffett’s Berkshire Hathaway and Equitas, the company set up to manage the liabilities held by those hapless investors. Under the arrangement, Berkshire Hathaway is in effect putting up $7 billion to buy out the remaining interests of the Names that were rescued by Equitas.

Let’s get serious. Mr. Buffett has made his fortune in large part by being smarter than smart about the reinsurance business. It’s unclear today whether he’s making a bet on the remaining liabilities, or on the direction of interest rates. Either way — odds are he’ll come out ahead.

All of which reminds us of just how convoluted the reinsurance business is. This is a timely consideration as we anticipate several stock offerings of new insurance entities which sprang up in the wake of last year’s calamitous hurricane season.

In what has become a well anticipated cyclical play, large catastrophes like the hurricane season of 2005 can deplete the insurance industry’s capital, in due course driving up rates. While existing reinsurance companies tend to take a hit from high claims levels, newcomers to the industry can sail in after the damage has been done and write a lot of new policies that take advantage of the higher rates. Then, assuming the claims and disaster levels go back to more normal levels, as has been the case this year, those companies make a killing.

This chain of events has occurred before, brought on by an excess liability coverage crisis in America in 1985, by Hurricane Andrew in 1992, and by the 2001 World Trade Center terrorist attacks. Some of the companies coming out of these periods such as PartnerRe Ltd (PRE $68) and RenaissanceRe Holdings (RNR $56) have done very well.

The question is, as many of the socalled class of 2005 companies prepare to issue stock to the public, can investors expect to repeat the substantial gains of the past?

There are several reasons to be cautious, according to Cathy Seifert at Standard and Poor’s. The primary concern is that reinsurance rates, which popped after Katrina, Rita, and Wilma blew through, may not continue at such high levels. The rise in rates, along with clear memories of the opportunities that awaited the fleet investor the last time around, attracted significant new capital overnight. This came not only from the start-ups, though they alone brought in $8 billion of new capital within three months.

Existing companies, too, were able to raise considerable new money through the issuance of cat bonds and through sidecars. The latter refer to special-purpose pools of capital raised by existing firms that are designated to new investments, and therefore attract those interested in taking advantage of new, higher, rates. That’s bad news for the newcomers, who have previously had the opportunity to compete in a capital-starved industry for a longer period of time.

Also, it is not totally good news that the storm experience has been so benign this year. While losses will be minimal, some of the refiguring of models and tightening of standards may be relaxed going forward, with the result that capital will be even more available, and rates may soften. This is unlikely to be the case as of January, when new contracts will be renegotiated, but could show up by mid-year.

Finally, the World Trade Center disaster took place in the midst of an insurance industry slump. Capital had been depleted by several years of poor profitability, which allowed for a great cyclical play once rates bounced. The following years allowed insurers to build capital, limiting the dimension of the upturn.

As several new companies prepare to come public, investors should be wary. Companies in this cycle will likely need a management team that can not only take advantage of today’s market, but also position the company to move into different markets as profit opportunities shift. This may be the commodity in shortest supply, according to some in the industry. Experienced managements are also best equipped to implement state-of-the-art risk management techniques. The start-ups most likely to launch, and perhaps to thrive, are those with seasoned management teams such as Jeff Greenberg’s Validus Holdings and Don Kramer’s Ariel Reinsurance.

Investors should also be wary of those companies funded largely by hedge funds or private equity shops that are looking to make a quick trade. If rates soften, the cycle could be extended, resulting in some restless shareholders. Finally, investors should look for companies with solid capital backing, just in case. What is clear is that no one can predict disaster. And only a few will profit from it.

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