The relationship between Bermuda's two insurance giants, ACE and XL Capital, is nowhere better evidenced than in the two companies' new headquarters buildings, now nearing completion, on the eastern edge of the capital city of Bermuda, Hamilton. The buildings are similar but different, like the two companies that will inhabit them in less than a year.

Both buildings are uniquely Bermudian creations. They are flat by global standards, like the two companies' management styles. But as the buildings begin to dominate the Hamilton skyline, the house that Brian Duppereault is building will rise a few feet higher than XL's, which is, so far at least, a fair summary of the companies' shared 15-year existence.

ACE and XL - the phrase is now standard Bermudian patois for the island's entire $50 billion (re)insurance sector. The two companies breathed life into Bermuda's international business industry when they arrived, XL hot on ACE's heels, from the Bahamas in 1986.

ACE and an insurance subsidiary had been incorporated in August 1985 in the Cayman Islands. In November of that year, John Cox, ACE's first chief executive officer, was appointed and the company wrote its first policy. Two months later, as 1986 dawned, ACE opened its first office in Hamilton, with six full-time employees, to write top layer excess coverage.

XL Capital was formed as Exel shortly after ACE, named for the excess layer it intended to cover, the area between the point at which most policies ran out and the level at which ACE began to do business.

In response to a capacity crisis for high level casualty risks, Marsh &McLennan and J.P. Morgan formed both companies, in co-operative capital market ventures which presaged the shape the world is taking today. An identical group of about 70 of the Fortune 100 companies funded both, with seed capital measured in the hundreds of millions of dollars.

They joined a Bermuda market that was almost exclusively focussed on captive insurance. Management at both companies knew Bermuda as a welcoming jurisdiction, essentially free of the problems that have plagued much of the offshore world, with a public sector willing to fashion its regulatory environment to suit both government and the governed.

As the next 10 years passed, both companies turned in the kind of economic performance that most corporations can only dream of. The traditional annual report graphs essentially showed straight growth lines, inclined firmly upwards. ACE and XL prospered in Bermuda, whose economic growth charts looked similar, albeit inclined at sharply smaller angles.

In light of the reaction that the companies' success has aroused of late in its American competition - and the imposition of US taxation on non-resident companies that either the current Chubb/Hartford proposals or some later effort will try to enforce - the years between 1986 and 1997 will almost certainly be seen as a golden era of Bermuda insurance, with ACE and XL flourishing in the sunlight.

By 1997, the age of organic growth had more or less run its course. Stuffed with the profits from a period of relatively low claims experience and high investment portfolio returns, the two Bermuda companies went swimming in deeper waters. ACE was following a plan set in motion by its Bermudian chief executive officer, Brian Duperreault, who joined the company in October, 1994. He and his number one officer, Dominic Frederico and other top ACE men were graduates of the AIG insurance academy. They softened AIG's marine corps style - which must have contributed to their leaving the service of Hank Greenberg in the first place - and went about exploiting proven demand and squeezing expense ratios until they cried uncle.

Within a year, ACE had added financial lines, which would prove to be a powerhouse, and strategic and alternative risk products, aviation product liability and excess property insurance. By its tenth birthday in November 1995, ACE had accumulated assets of $3.5 billion and become an established multi-line insurer and reinsurer.

ACE and XL did not invent the flat management style, but they were capable, as start-ups, of using it to best advantage. The two companies came to life at the dawn of the information age. They did not require lines of vice presidents at the pay window and had the first generation of modern information systems and only rarely anything at all in the unrealised losses column of their well managed investment portfolios.

Phase two saw ACE use some of that war chest to acquire a phalanx of new businesses: Methuen Underwriting (51 % in March, 1996, the balance eight months later); Bermuda catastrophe reinsurer Tempest Re (July, 1996); Lloyd's managing agency Ockham Worldwide (November 1996); US based Westchester Fire Insurance (January 1998); ACE European Markets, incorporated in Ireland (September 1997); ACE USA (formed January 1998); another Bermuda cat reinsurer CAT Ltd. (April 1998, integrated into Tempest Re); Lloyd's-based Tarquin (July 1998, taking ACE to 9.3% of Lloyd's capacity); and in January 1999, the coup de grace, the acquisition of the domestic and international property and casualty business of CIGNA Corporation (completed July 1999).

In three years, ACE's asset base had risen eightfold to $30 billion, roughly the size of the entire Bermuda market less than a decade earlier. By any yardstick, ACE had performed phenomenally well and propelled itself into becoming one of the world's largest insurance companies. Were it listed on the Fortune 100 which spawned it, ACE would rank 88th by assets.

By 31 December 1999, the company had digested the Cigna acquisition and organised itself into five operating units:

  • ACE USA (1999 gross premiums $1.567 billion, or about 41% of all ACE business) is primarily the domestic property and casualty business acquired from Cigna, and other US interests.

  • ACE International ($932 million, 24%) is the international operation of the Cigna property/casualty acquisition, organised into four segments: ACE Europe, ACE Far East, ACE Asia Pacific and ACE Latin America.

  • ACE Global Markets ($635 million, 16%) houses the operations at Lloyd's, where it is the largest single block of capacity.

  • ACE Bermuda ($553 million, 14%) is what might be called “the old ACE”, although with the predominance of property/casualty elsewhere in the group, it now amounts to specialty lines: excess capacity, D&O, aviation, satellite and financial lines.

  • ACE Global Reinsurance ($182 million, 5%) consists primarily of catastrophe reinsurer Tempest Re.

    At present, ACE Bermuda is the most profitable segment, although ACE Global Insurance also fights above its weight in terms of profitability. The continuing level of high returns from the “old ACE” operations was the platform on which the Cigna acquisition was constructed. Profits at ACE USA and ACE International should begin to grow as the merger is completed and the new venture defines itself and moves its focus outward.

    XL Capital has been portrayed more than once as the “tortoise” to ACE's hare, a metaphor that works only when the companies' rate of growth is compared. XL is running on a different track from ACE. While ACE has staked its claim in the property/casualty business, recent developments at XL suggest that it has its eyes trained on the financial services sector, servicing the capital markets from which it sprang.

    Comparing XL

    The tortoise comparisons were made most often in the days when ACE had begun its spending spree, but XL had not. XL went public in 1991 offering to stick to its knitting: excess coverage. It spent the first half of the 1990's bull cycle accumulating from its core business a formidable pile of cash, which by 1998 was burning a hole in its pocket.

    In August of that year, XL acquired Bermuda's first catastrophe reinsurer, Mid Ocean Re, and the Brockbank Group at Lloyd's. In October, it created financial products and services units. In November, joint ventures with FSA set up two new financial guarantee insurers.

    In February 1999, XL formed its structured enterprise risk unit and changed its name to XL Capital. The disadvantages of changing brand name were outweighed by the need to reflect the new reality.

    In March 1999, XL acquired a stake in money manager, Highfields Capital. In May, it purchased Intercargo, a US logistics and customs bond insurer. In June, it bought ECS, a writer of specialist environmental risks and also that month showed that, it too, saw the advantages of scale, with the big league purchase of Nac Re, the leading independent US casualty reinsurer. In January 2000, it added almost total ownership of Latin America Re.

    Today, XL has four main lines of business: insurance, reinsurance, its Lloyd's business and financial services.

  • Reinsurance remains XL's largest segment (1999 net premiums earned and other related income $0.9 billion, or about 52% of all XL business). Natural catastrophes in late 1999 and satellite losses earlier in the year contributed to a $15 million loss on a combined ratio of 101.6% in XL's reinsurance underwriting sector.

  • XL's strategy was always to be a primary carrier as well as a reinsurer. Its insurance segment ($471 million, 26%) fared better last year, reporting an underwriting profit of $25 million on a combined ratio of 96.1%.

  • The Lloyd's operations, Brockbank Group and Denham's ($402 million, 23%), carried a combined ratio of 116.6 %, the group's highest - with a group-high loss ratio of 83.6 % The managed syndicates earned a mere $6.7 million underwriting profit. Underwriting margins will improve as the market hardens.

  • Financial services were the star performer in 1999 ($48 million, or 3%), probably a case of the future casting its shadow forward. The combined ratio of 113.6% is less relevant in this segment; underwriting profit last year was $24.0 million.

    Rivalry

    Fifteen years ago, the two companies were complementary. As they have grown, it was natural that eventually they would run into each other on the playing field. The outcome of such meetings follows no particular pattern, as was demonstrated by the Sovereign and Cap Re experiences.

    Sovereign Risk Insurance was formed in July 1997 to underwrite political risks on behalf of “strategic partners” ACE Bermuda Insurance and XL Insurance. Sovereign rapidly became one of the world's leading political risk insurers and reinsurers. Its clients include international financial institutions, multi-national corporations and national export credit agencies. Its portfolio of exposure spread exceeds $3 billion.

    ACE had begun working with Cap Re in March, 1998 and within 15 months had sealed a deal to acquire it, mostly for ACE stock, subject to a shareholders' vote early in October. The lengthy period between the acquisition and its approval were all but over when, out of the blue, XL put in an all-cash bid superior on its face to ACE's, although that offer had favourable tax implications.

    After a short but intense battle with few holds barred, XL withdrew, took a profit on its Cap Re holding and moved on. Although no one in Bermuda's genteel atmosphere would want to talk about it, some ACE people probably feel a little aggrieved by the Cap Re dance, which prompts the question: do the leaderships see themselves in competition?

    “We are in direct competition in some markets,” says Brian O'Hara. “On certain lines, it is a collaborative effort. Right now, ACE is much more retail than we are.”

    Brain Duperreault thinks: “It is important to notice that the same forces are acting on them and us. It is how we choose to react to those forces that define our differences. We have both felt the need to diversify. ACE has gone more into the global markets, while XL has focussed on reinsurance. The market place is such that we are in competition with everyone on the global stage, and sometimes that includes our partners.”

    ACE vice chairman Donald Kramer sees the development of the two companies as “an interesting study. The two companies do have differences in their management philosophies and skills,” he says.

    They agree on one thing, right now: the threat posed by Congressional moves to close down the tax advantage Bermuda insurers enjoy because they are domiciled in a separate jurisdiction. “We coordinate our efforts very closely on that issue,” Mr O'Hara notes. Mr Duperreault has taken the foreground, with repeated attacks on the proposed legislation, while XL has stayed in the background, trying to convince influential people one at a time.

    Mr O'Hara says: “Both companies have very little bureaucracy. They have always been lean and mean. You have to remember that many ACE leaders have an AIG background, so they give real autonomy to their operating units to compete with each other. In my upbringing in the industry, you co-ordinated underwriting policy, which is a different tack. Some of the difference between ACE and XL is just what works best in different corporate cultures. At the holding company level, we add support and look after areas such as corporate policy, goals and vision.”

    Donald Watson, a director of Standard & Poor's, says: “Vision is a fuzzier proposition for XL. One person does not run the show at XL the way Brian Duperreault does at ACE. XL has a team management style.”

    Brian O'Hara would disagree as to the charge of fuzziness: the appointment of Clive Tobin to head XL Insurance is tacit acknowledgement of the shape of things to come. Mr Tobin had been president of XL insurance and was responsible for developing most of XL's financial products.

    Don Kramer sums it up with his tongue in his cheek: “Both are Bermudian companies with leaders called Brian, who both have wives called Nancy,” he says. “In the words of the poet, our similarities are different.”

  • Roger Crombie is the Bermuda correspondent of Global Reinsurance.

    He is a regular contributor to local and international business publications and a fellow of the Institute of Chartered Accountants in England and Wales.