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Bermuda Goes Global

The Year 1997 was one of change for the Bermudian insurance markets and 1998 is already tracking as an acceleration of change with two major consolidations proposed and other acquisitions waiting in the wings.

Access to cheap capital has provided insurers the means and declining premium rates have provided the incentive for insurers to diversify. Within the insurance and reinsurance industry in particular, product line and geographic diversification have traditionally been viewed as a key ingredient toward reducing earnings volatility.

Diversification enables an insurer to smooth out regional and product line performance with a diversified book of risk. Bermuda has adopted this philosophy with a passion over the past few years with branch offices opening around the globe and more recently, acquisitions.

As noted elsewhere in this report, during 1997 acquisitions included EXEL¼s purchase of GCR Holdings for its nonproportional catastrophe book and separately a Folksamerica shell to directly access the US market; PartnerRe acquired SAFR for its proportional book and position within the European and Asian markets; and Terra Nova (Bermuda) Holdings acquiring Compagnie de RÈassurance d¼ile de France (Corifrance), to expand upon its European book and market presence.

As of March 31, 1998, a definitive agreement was signed between EXEL and Mid Ocean for its property catastrophe reinsurance subsidiary and a strong foothold within the London market via the Brockbank Group. ACE also signed with CAT Limited for its tailored underwriting approach.

Geographical expansion and access to markets has been a primary driver of many of the acquisitions, particularly the more recent move to invest in the US and the slightly earlier investments in London. The London market, and Lloyd s in particular, has been a key leg of Bermuda¼s geographic expansion.

The London market provides Bermudians with product diversification and international market access. For 1998, it is expected that the Bermuda insurance and reinsurance market will account for roughly 46 percent of the 2.3 billion pounds in Lloyd¼s capacity from corporate members backed by insurance interests. Another good reason for Bermuda¼s "across the pond" flight is that a number of Bermuda¼s management teams have strong ties to either Lloyd¼s or the insurance companies within the London market.

Expansion has its risks and the competitive price environment is beginning to reflect directly the impact of lower pricing with the latest estimates for Lloyd¼s 1996 and 1997 years of account expected to decline sharply from the record recently reported for 1995.

Perhaps more important in the short run is access to the US market. Of the survey¼s participants, three companies have newly gained a foothold within the US marketplace. In 1997, ACE acquired Westchester Specialtv Group (now known as ACE USA.) from Talegen holdings providing direct writings capabilities and licensing in 50 states' plus a new book of specialty products.

In 1998, EXEL acquired shell company Folksamerica General Insurance, now known as XL Insurance Company America, to write directly its own core products, multi-year, multi-line insurance, as well as new lines of business in the US.

Also in 1998, RenaissanceRe Holdings agreed to acquire Nobel Insurance to expand on the primary side through low-value homeowner¼s coverage, as well as inherit new lines of business. In addition, RenaissanceRe subsidiary, Glencoe Insurance, was set up in 1996 as an excess and surplus lines writer of commercial catastrophe-exposed property business, and has set up DeSoto Insurance in Florida to write "selected" portions of Florida Residential Property & Casualty Joint homeowners policies.

Many of the Island¼s insurers have long had US underwriting affiliates such as Mutual Risk Management through its subsidiaries who collectively form the Legion Group.

While change brings new opportunities for growth, change also brings with it uncertainty. For Standard & Poor¼s uncertainty clouds our crystal ball making it more difficult to predict operating performance and downside risks as a company s risk profile changes. Corporate mergers may yield far more than one plus one, but on occasion, a merger represents something less than the companies might individually, particularly if the combined entity forgets what made the original companies successful.

As with any union, the merger of two distinct corporate cultures and businesses can produce a new entity quite different from either of the parents. In the US, the 1970s was a period for the conglomerates which yielded the unsatisfactory returns of the 1980s which then saw their breakup into more focused business units.

Relatively cheap capital in the latter part of the 1990s is providing the means to grow accretively, but risks bringing on the same problems of excess as junk debt wrought at the beginning of this decade. The loss of focus and key personnel and changes in underwriting style, while not immediately fatal, can quickly impair management decision-making and lead to sub par performance.

Standard & Poor s acknowledges the positive impact that Bermuda provides to the global insurance and reinsurance markets, but also that Bermuda must cope with prevailing market pressures. As both the stock and insurance markets ponder their concerns over how Bermuda will optimise its capital base, intellectual capital is viewed as a staple for Bermuda¼s success. Innovative thinking, while blending financial disciplines and technological solutions with risk-management strategies, has given Bermuda a product development and marketing edge over most markets.