Bermuda's reinsurers faced a pivotal year in 1997 as the entire industry became redefined, a new A.M. Best special report has observed.

The report noted that distinctions within the Bermuda market had become increasingly vague as insurers and reinsurers merged, acquired and diversified in response to soft pricing and excess capacity.

That view was crystallised after the market watched the original eight property catastrophe reinsurers shrink to four remaining independent companies: RenaissanceRe, PartnerRe, LaSalle Re and IPC Re.

Mid Ocean Re and Global Capital Re were absorbed by EXEL Ltd., while ACE Ltd.

assimilated Tempest Re and CAT Ltd.

And, in less than four years Bermuda companies had become Lloyd's largest single source of corporate capital.

The report states: "Confronted by the prospect of idle capacity and moribund shareholder returns, Bermuda opened its corporate coffers and embraced a strategy of diversification and global expansion.

"In general, these insurers and reinsurers have resisted downward pricing pressure through innovative product design, diversity in their underwriting portfolios and prudent capital management through acquisition, merger and share repurchase and dividend plans.

"1997 was a pivotal year for the island's reinsurers. A rejuvenated Lloyd's market, an unusual lack of major catastrophe losses in the US, increased competition from European and US reinsurers and plummeting primary property insurance rates had led to dramatically reduced catastrophe pricing. "In turn, flat or declining premium revenue led many of Bermuda's catastrophe investors and managers to diversify into related property, marine and non-catastrophe lines, and to invest more heavily in Lloyd's.

"Some original investors, having watched catastrophe capacity rise, prices fall and rates of return level off, opted to exercise exit strategies and line companies up for takeover or merger.'' The comment on the Bermuda market came as a side bar to the report's main observations about the market in general.

Consolidation has created such highly capitalised reinsurers with such widely spread risk that even two hurricanes the size of Andrew would not substantially impact their financial stability.

"A downturn in the financial markets is more feared,'' said the Best report.

"Increasingly, these companies have committed larger amounts of capital to global financial markets. Even so, an investment loss that would adversely affect these reinsurers would transform global economies.

"For a portion of the remainder, separated from the top-tier reinsurers by an ever widening gap in terms of surplus and business written, a sequence of natural catastrophes, or an adverse shift in the capital markets or economic conditions, may very well redefine their destinies.'' A.M. Best said reinsurers were taking a decidedly entrepreneurial stance in their quest for top line growth, with global business strategies, focused on specific markets. Key points include: Global reinsurers transcend boundaries to compete for shares of static, and sometimes contracting markets. Accelerating consolidation is creating an ever increasing concentration of both premium and capital among an ever-tightening handful of participants.

A snapshot of the industry and its players during such a period of rapid consolidation is transitory at best, and the convergence of financial services worldwide obfuscates the view.

Decreasing primary market demand for reinsurance intensifies reinsurer competition, leading to pricing pressures that are not fully offset by economic gains. Emerging markets offer limited growth opportunities for the near term.

Distinctions between distribution channels are becoming irrelevant as reinsurers develop multiple access points to reach the ultimate customer.

Securitisation of insurance risk, as well as "commodity'' trading of reinsurance tranches, appears poised for wider market acceptance. Wall Street, the brokers, and most, if not all, the major reinsurers are committing real capital and resources to these efforts.

The gap in terms of surplus and business written between market leading reinsurers and those struggling to maintain or improve their market position continues to widen.

REPORT NJ