A review of merger activities of Bermuda-based insurers, ACE and EXEL, has concluded that ACE is likely to be under greater pressure to find another suitable take-over target.

And a leading insurance analyst forecasts 12 to 14 percent improvements in earnings per share for the two insurers.

The viewpoints are contained in a just-released issue of Reactions Magazine, which argues that Bermuda reinsurers, especially the relatively small ones, were take-over targets from the time they took shape in the early 90s, and became the victims of their own success.

In the absence of major losses, the property catastrophe reinsurers, were stock-piling money faster than they could give it back to shareholders, and prices collapsed.

Traditional capacity came back to the market in a big way, making for tough competition.

But the article claims that Bermudian firms, because of the tax advantage of being domiciled here, can price their business 30 to 35 percent below US businesses and still make a profit.

That's why, Donald Watson of Standard & Poor's is quoted as saying, ACE and EXEL are acquiring other Bermuda firms, avoiding the tax issue.

The article states: "As well as giving some credibility to the rumours that ACE had shown interest in Mid Ocean before its rival intervened, the tax issue implies that the four remaining Bermudian reinsurers will have to find a local solution, if their management or shareholders should decide that independence is no longer the best option and it is very possible that ACE and EXEL might be offering shelter to one or two other neighbours before the year is out.'' ACE and EXEL are held out as companies that need to diversify in a hurry, because of hungry shareholders that have been led to expect great returns, at a time when pricing in core liability markets is down.

Mr. Watson said it was favourable for the two companies to acquire local reinsurers because of the relatively flat management structure of Bermuda firms, together with the absence of tax implications.

The article discusses ACE's new billion dollar property catastrophe operation, which is a combination of the acquired reinsurers Tempest Re and CAT Ltd. It also inspects EXEL's purchase of two other cats, Global Capital Re and Mid Ocean Re and concludes there is less similarities in the books of business between the former two than the latter two.

Mr. Watson suspects that the property catastrophe portfolios of the combined reinsurers will be unbalanced.

But the insurers have both claimed that the purchase of two cat reinsurers brought together business books that complemented each other, as opposed to over-concentrated business in one area.

Said Watson, "The allocation of exposures geographically is a key component of their strategy. They don't want to be over-exposed in any one zone. Now that they're going to combine, they're probably going to find that they are concentrated in some zones to a degree that they'd probably prefer not to be.

The result is that they're voluntarily going to cut back.'' Watson said that ceding companies might refuse to place any more than 20 percent of their programme with what is essentially one company. Before the acquisitions, ACE and EXEL were similarly sized, with shareholders' equity each of about $2.6 billion. ACE had larger revenue from 1997 net earned premium income of $645 million (EXEL: $541 million).

But EXEL was more profitable with a return on equity (ROE) of 29.5 percent (ACE: 19 percent), even though ACE's combined ratio was superior.

ACE is planning a share issue to raise $1.5 billion, while EXEL is planning to continue the absorption of Mid Ocean before spending $500 million in share buy backs.

Leading Wall Street insurance analyst, Ronald Frank of Salomon Smith Barney, said EXEL would increase its share of Brockbank's managed capacity at Lloyd's, so that EXEL would be assisted in its pursuit of further take-over targets.

Reactions Magazine said the prospect of further acquisitions for the two companies was concerning to rating agency Standard & Poor's, which had put a negative outlook on their ratings.