fter almost 20 years, claims from more than 1,000 creditors, the filing of multiple lawsuits and countless hours of tracing and evaluating assets, one of the longest-running liquidations in the history of Bermuda's insurance industry is over. Barring any last minute objections, which at this point is highly unlikely, Mentor Insurance Limited will finally be dissolved by the end of the year, after wind-up proceedings which began back in June 1985.

"It was a long process but it's not necessarily a record-breaker in terms of the duration for an insurance liquidation, and it was a complex case but actually the sheer volume of claims involved was one of the biggest challenges," says Charles Kempe, former partner of Ernst & Young Bermuda. Mr. Kempe was a joint liquidator on the Mentor case along with Mr. Nigel Hamilton, then a partner at Ernst & Young in London.

chartered accountant and 32-year veteran of the local accounting industry, Mr. Kempe is closing the books on Mentor as his last liquidation case, since it has spanned so many years that both he and Mr. Hamilton officially retired while proceedings were still in full swing, Mr. Kempe doing so in 1996. However, both men have remained on the case in their capacity as joint liquidators and as consultants to Ernst & Young to see its twists and turns through to final resolution.

Mentor Insurance was established in 1968 as a captive insurer for its US parent Ocean Drilling & Exploration Company (ODE). The company also wrote substantial third party business, primarily US casualty risks. By January of 1985 the company had stopped writing insurance and had started to go into run off (meeting the company's liabilities and not taking on any new business). By May of that year management at ODE decided to move the run off proceedings back to their base in New Orleans. However, in a dramatic turn of events, Bermuda's then-registrar of companies Mrs. Verbena Daniels ordered an insolvency investigation to assess the company's position and ended up preventing the wholesale removal of Mentor's records and computers to the US.

"Ernst & Young was asked by the registrar to perform the investigation to ascertain the state of Mentor," says Mr. Kempe. "A petition was then made to wind up the company which brought the shipment of records to a stop."

So what went wrong at Mentor?

"They basically lost their way," Mr. Kempe says. "You have to recall the issues in the insurance market in the late 1970s and early '80s. Cashflow underwriting was widespread, where companies were willing to take on insurance risks unlikely to produce underwriting profit, but had cash (from premiums) to make investments and so looked to benefit from the investment profits and high interest rates of those times.

"Also, the view among tax advisors was that US corporations could protect captive profits from US tax, and avoid having their captives attacked as being tax shelters for the parent company, by having them assume considerably large amounts of risk from third parties. So some captives also took on a lot of unprofitable risks that the market frankly had trouble placing anywhere else."

Mr. Kempe adds that the Lloyds market was undergoing "a period of disorganisation" which also affected the Bermuda market.

"They were able to lay off risk to Bermuda companies that they really shouldn't have touched," he says.

Mentor Insurance, like many other companies in the global insurance market of the day, engaged in these practices and according to Mr. Kempe "they had an inexperienced management to deal with all of this".

John McKenna, a partner at Ernst & Young who has also worked on the liquidation in recent years agrees:

"They had inexperienced people with a lot of responsibilities, something that just wouldn't happen today," he says. "And it was a completely different time in the industry; insurance and reinsurance in the US in the early '80s was underpriced and difficult to estimate. Also communications and reporting was not the same in those days."

Which is why he and Mr. Kempe feel that whilst the case was one of the worst examples of a major Bermuda captive becoming insolvent, the jurisdiction's reputation was not ultimately harmed by it.

"Bermuda's early warning system prompted the registrar of companies to take prompt action, which was a good thing," says Mr. McKenna.

"Bermuda's insurance industry did a lot of hand-wringing about this large Bermuda company being liquidated and that the Bermuda market would be blighted as a result," says Mr. Kempe. "But this was a market-wide malaise, not peculiar to Mentor or Bermuda.

"What brought Bermuda kudos was the efficient way the winding up of the company took place," he adds. "It was done far more expeditiously than the process in the US where these cases are dealt with by individual State insurance commissioners."

He says another plus was the fact that by the time the Mentor liquidation began Bermuda's laws governing companies operating here had been updated significantly.

"By the '80s we were operating under the new Companies Act which took a more realistic approach and meant that there were no conflicts with a liquidator's ability to operate outside this jurisdiction," Mr. Kempe says. "The new legislation dovetailed nicely with corresponding US statutes, and foreign liquidators could apply for their proceedings to be recognised in the US; once accepted they could then operate over there with the same rights and obligations they have in Bermuda."

In this respect the Mentor case was apparently groundbreaking for the insurance industry and for Bermuda.

"Mentor was one of the first cases where one was able to obtain recognition, court orders and so on, to operate in the US as we would here," says Mr. Kempe. "At the beginning we were really breaking new ground with this case, our ability to operate cross-border was enhanced ? to the US and the UK ? and having that ability was of great assistance. For example, it meant that any lawsuits that had been filed in the US could be extinguished right away since the parties involved had to follow the established procedure for making claims instead."

This was an undeniable benefit considering the there were reportedly over 100 lawsuits filed against the company across different states in the US.

verall, the numbers involved, together with the complex chain of creditors who shared risks with Mentor and debtors who now really had little incentive to pay what they owed to the company, makes this liquidation a somewhat fascinating case study. Claims initially filed by creditors totalled over $970 million, which was whittled down to $397.8 million after Mr. Kempe and Mr. Hamilton had completed the painstaking task of evaluating the validity of each one. Over the past 19 years they have recovered over $347 million of assets and ended up finally distributing a net $303 million to those who had valid claims against the company. Clearly with so many different parties involved things can get complicated.

"Mentor had a subsidiary in London which was also insolvent," says Mr. Kempe by way of example. "Some creditors didn't know if the London subsidiary or the Bermuda company owed them so that had to be unravelled. There was also the group of five banks that had provided Mentor with letters of credit totalling over $100 million. As the largest creditors they basically wanted to control the liquidation proceedings; we had to sort that point out in a rather contentious meeting in New York that lasted five-and-a-half hours!"

He says, however, that collecting the money owed to the company was by far a greater challenge.

"The collection of receivables was from a broad spectrum of parties, ranging from the most honourable, creditworthy companies to the most recalcitrant and difficult entities," he says. "When a company is insolvent debtors typically lose the incentive to pay their debts as there is no prospect of continued business with the firm involved. In these cases you really see the real nature of who you're dealing with."

Some eventually ended up paying as a result of what Mr. Kempe calls "substitute incentives", such as lawsuits filed by the liquidators, or being forced to do so under terms of a merger or by a change of management.

As he reflects on the Mentor liquidation Mr. Kempe feels that valuable lessons were learned from this and other similar cases from the perspective of both the industry and the regulators.

"There's much better management in the industry now and industry has learned to deal with insolvencies much more practically; the regulators also have an enlightened approach to dealing with these practical problems," he says. "It's less likely that there'll be a total meltdown as there was in Mentor these days because reconstructive efforts to avoid companies failing so spectacularly take place well before meltdown is reached.

"There's better regulation and reporting requirements and more involvement of independent actuaries. This means that their evaluations discover problems and issues that previously may not have come to light until the company hit the wall."

r. Kempe clearly relished the professional challenge of the Mentor case ? "If I was 20 years younger I'd take it on again!" ? but he is pleased that it's finally resolved.

He is enjoying his retirement, which he says is keeping him busier than ever "but it's great because you can set your own timetable and not have a client or colleague telling you you've got to be in New York for a meeting or something." Reflecting on his "enjoyable, challenging and rewarding" career he advises young aspiring chartered accountants to put their full commitment to their profession in order to see the full rewards they can achieve:

"To be successful in accounting requires a very strong commitment," he says. "Learn as much as you can; get as much extensive experience as you can and put all of you energy into it and the rewards will come."