insurance industry firms named as "best picks'' for 1998 by analysts at J.P.

Morgan Securities Inc.

A report on the industry noted that the securities firm narrowed their best picks for the year to just two of their 1997 favourites because after a profitable 1997 year, 1998 will be "a far more difficult year for the property/casualty insurance industry''.

The other "best pick'' was Allstate Corporation.

J.P. Morgan said: "In increasingly difficult commercial insurance markets, ACE has the capital strength, management talent and appetite for risk that should produce superior long-term returns to shareholders.'' Other Bermuda companies received favourable ratings from Morgan's equity research group as well.

EXEL Ltd. and Mid Ocean Ltd. were rated "long-term buy'' in the mid-capitalisation category headed by ACE. And PartnerRe was rated "market performer.'' In the small capitalisation category, Terra Nova was rated "buy'' and RenaissanceRe was rated "market performer.'' Author of the report, James R. English, expects ACE to prosper in a world of commercial insurance which is now apparently cycle-less.

He said: "The debate over the death of the historical insurance cycle has become irrelevant, in our view, because financial and market forces will severely limit duration and amplitude of future pricing swings.'' He said the "alternative market'' was an imprecise but useful term referring to a variety of self insurance mechanisms. But it will absorb an increasing amount of risk formerly transferred to the p/c industry.

The growing size and sophistication of commercial insureds and new product development by the p/c industry itself will probably ensure rapid alternative market development.

Attempts, said the report, by the industry to raise prices significantly will very likely stimulate further migration into alternative mechanisms, "from which business rarely returns''.

The report stated: "Taking a lesson from the success of Bermuda investments following the 1992 hurricanes Andrew and Iniki, substantial capital resources external to the p/c industry are arrayed to exploit future supply/demand imbalances, which typically underlie insurance pricing cycles.

"Although such resources cannot prevent supply constraints following large losses (whether property or casualty related), they can certainly limit their severity and duration.

"As a result, it may not be possible for insurance companies to recover from significant losses with subsequent higher prices -- there simply will not be time.'' Further, the competitive threat from securitisation will cap the pricing actions of traditional commercial insurance markets, again truncating cyclical price swings.

The surge of p/c capital formation in the 1990s will keep insurance markets highly competitive for years.

The report said: "The combination of low catastrophic losses since early 1994 and substantial appreciation of the industry's stock and bond portfolios have reduced industry leverage to the lowest levels in modern memory.

"Short of a period of very high losses accompanied by substantial declines in financial markets, we believe commercial insurers will continue to accumulate capital faster than their sales (premium) grow, not a happy scenario for sustained price increases.

"ACE has demonstrated an ability to flourish even under these harsh conditions.''