The outlook for investors in the property and casualty insurance industry is bleak according to analysts cited by A.M. Best in the rating agency's special edition magazine on the sector.

However the analysts predicted that six companies -- four of them based in Bermuda -- would emerge as victors in the competitive market place. Bermuda is also cited as a place where many companies may chose to relocate business so as to compete globally.

Bermuda-based Mutual Risk Management Ltd., ACE Ltd., XL Capital Ltd. and Partner Reinsurance Co. Ltd. are cited as the notable exceptions in a depressed marketplace. US based Progressive Insurance Group and American International Group Inc. were also picked to succeed, the analysts said.

American International has its headquarters in Bermuda.

Over capitalisation and the inability to use the capital effectively into new business are cited as the reason insurance companies in the sector are bad bets for investors, Best's Review stated.

Vincent Dowling, senior analyst at Dowling & Partners, is quoted as saying the industry is a "capital trap'' in which a lot of capital "is stuck in the industry and can't earn an adequate return.'' He believes the underlying results for the industry are worse than has been reported.

"As a result, what you want to do is try and pick companies that have good balance sheets and that will be the survivors, that will be the companies that do the acquiring,'' he said.

Alice Schroeder of Paine Webber compared the insurance industry to "a brackish pond populated by some pretty ugly ducklings'' and said the good companies, "the swans'' will fly off to places like Bermuda.

The most appealing companies deliver consistent performances, underwrite for profit, not hoard capital, control expenses, invest wisely and not pursue growth for growth's sake. The successful companies will go global, deciding not to depend on a single distribution system.

"Eventually these swans will think of flying away from regulated domiciles to Bermuda,'' she said.

Meanwhile Weston Hicks, senior research analyst at Sanford C. Bernstein & Co.

Inc. said the property and casualty industry was in the middle of a deflationary period.

The winners in such an environment will be companies that segment risk better than the average and those at the forefront of securitisation and integrated risk management.

"I think convergence certainly in five to 10 years will be a reality and property and casualty insurance will be one of many products that financial institutions use to manage risk transfer,'' Mr. Hicks said. "That would suggest that companies such as XL and Mutual Risk that are on the forefront of experimenting in these developments will have a better chance of participating in the new reality.'' ln the magazine's review of the 1998 year, A.M. Best said the mergers and acquisitions in the industry were the most costly on record. And with $2.5 billion in insured losses, Hurricane Georges was the fourth most costly insured catastrophe on record.

The $36 billion merger of Citicorp and Travellers Group Inc. topped the list.

A.M. Best said the merger of a banking group with one that has insurance business could be a forerunner of the growth of the securitisation of risk.

ACE Ltd., XL, Partner Reinsruance Co. Ltd., Renaissance Reinsurance Ltd. were the major Bermuda players acquiring and expanding in the US and overseas last year.

Over capitalisation, the soft market, the attempt to reduce costs, reach more customers and expand into the international markets are the forces driving the merger and acquisition activity.

A.M. Best also warns that the Year 2000 computer problem will be the second most important financial threat facing property and casualty insurers behind catastrophe risk in the coming year. A.M. Best estimates the industry faces a $1 trillion in total exposure, with up to $500 million related to potential liability and defence costs.

The growth of the alternative market was another threat to the growth of the property and casualty industry. A.M. Best estimated the alternative market grew an estimated 25 percent last year, compared to a 2.9 percent growth rate in the traditional market.

More companies are opting to establish captives or rent-a-captive, go into self-insurance pools and risk retention groups. It's a market that now accounts for one-third of all insurance premiums.

Most major insurers and reinsurers have attempted to stem the erosion from their traditional lines by serving the market, A.M. Best stated.

Analysts say investors face grim prospects in insurance industry but...