The Bermuda reinsurance market should continue to improve its share of the worldwide market -- but at a slower rate, a global reinsurance market investment report has predicted.

Published this month, it said the growth from Bermuda's current five percent share of the overall market will come through continued diversification.

Prepared by Michael Lindsay in London and Peter Wade in New York, the Lehman Brothers report is positive on the Bermuda market, but tempers its optimism significantly due to the deteriorating rating environment for catastrophe reinsurance.

The bulk of reinsurance premiums generated in Bermuda are still from catastrophe reinsurance. Rates in that line of business dropped ten to 15 percent in 1995 and 1996. Lehman Brothers expects the decline to decelerate and flatten over the next two years, and then grow moderately (maybe three to five percent).

The projections are being made with the usual proviso that a large catastrophe in a heavily insured region could harden rates and boost the values of the companies significantly. Outside of that, the report emphasises that the management of capital will drive strategic decision-making, as Bermuda companies strive for the optimal capital structure to handle the significant excess capital they are generating.

The report reflects one view that greater growth opportunities for reinsurers are offered more in Europe than in Bermuda or the US. The analysts said there has been modest, continuing improvement in the structure of the overall reinsurance industry in recent years as a result of mergers and acquisitions.

Already this year, acquisitions in reinsurance total $9 billion ($14.5 billion since 1990) and Lehman Brothers believes there are more to come. Already the top five companies control more than 40 percent of the global market.

The consolidation of reinsurance capital is erecting capital barriers to entry, and has established a superior structure to that of the primary industry.

The report said, "The significant excess capital positions of the Bermuda reinsurers should prompt more acquisitions out of this region, although admittedly tax implications will play a large role in acquisitions from this tax advantaged domicile.'' Bermuda currently has about five percent of the worldwide reinsurance market share.

The report said new gains will be driven by the desire to deploy significant excess capital, forcing investment to acquire companies or into start-up for new corporate projects. The lower premium rates in property catastrophe will also force companies to look elsewhere for growth.

And the tax benefits of being in Bermuda are a substantial competitive advantage when compared with the rest of the world's reinsurance domiciles, enabling companies here to compete successfully for the marginal reinsurance customer.