Faced with the prospect of more mainstream competitors going after their clients, Bermuda's original excess liability companies have responded with an aggressive strategy of directly pursuing business outside of the island. Ahmed ElAmin reports.

The three companies ACE Ltd, EXEL Ltd and the smaller Starr Excess Liability Insurance Co, Ltd, have been notably successful at providing the high levels of excess liability insurance the world's largest companies needed and for a time could not buy elsewhere. More recently, however, the trend of business worldwide has meant increased competition for fewer clients with larger and more sophisticated needs.

ACE and EXEL have taken a traditional tack in response - diversification by product line and globally, either through acquisition or by growth. Meanwhile, Starr Excess, a keen competitor with ACE and EXEL which was taken under the protective wing of giant American International Group Inc. (AIG) in a buyout earlier this year, is to remain a specialist.

The problem facing all three companies, says Starr Excess vice president of excess casualty, David Perez, is getting business to Bermuda in the first place. Business is not flowing into the island at the same pace as it used to, he explains. The companies, therefore, have to figure out how to expand their distribution.

"A lot of business that was once considered traditional Bermuda market business is now mainstream," Mr Perez says. "Many more companies feel that they can write it with lower prices and broader coverage and they can do it successfully in the long run. This change in underwriting focus in the global markets has impacted the Bermuda markets to such an extent that the trend over the last few years has been a focus not on the integrity of the core lines but rather on the strength of the diversity that is offered to the insured when they come to Bermuda - the ability to solve many of their problems in a single shot."

Starr's distribution problem was essentially solved when AIG bought up the remaining 76% of the shares it did not already own. Changing incorporation to Delaware from Bermuda is another part of the strategy. It means that clients can now access Starr Excess directly from the US, while the company plans to continue as a leading excess carrier in Bermuda. It will maintain an operation in London, the exact status of which will depend on regulatory authority, and a subsidiary in Dublin. Further details of the company's future structure had yet to be announced.

David Perez says the company will leverage AIG's financial strength and technical expertise to expand its global reach. New products are being rolled out within the company's core lines, long term excess casualty, and excess directors' and officers' coverage. It is development of the business by increments, rather than by diversification. Mr Perez reads the Bermuda market as evolving in response to the increased global competition.

Mr Perez says Starr plans on taking a different approach by remaining firmly within its niche, since AIG is already well diversified. Starr Excess has continued to grow since it was formed with private capital in 1993. Assets have increased by 23% to $656.4 million at the end of 1997 while liabilities increased by 29% to $348.6 million. Premiums written peaked at about $110 million in the 1996 financial year before falling about 14% to $94.3 million in 1997.

"Starr has not taken the path of diversification for a few reasons," Mr Perez explains. "It is difficult to find opportunities to diversify. A lot of business is under stress. It is tough to find a product line that would give you adequate return for the exposure you are going to take on. However, there is a continuing need for long term excess casualty insurance coverage and excess D&O coverage. We see Starr continuing as a very high net line excess player for an excess coverage niche within the AIG group."

EXEL buys Mid Ocean

Meanwhile ACE and EXEL took the path of acquiring companies to expand their product lines and their global reach. That battle for primacy came to a head in March when EXEL made an agreed offer of $2.2 billion in stock for the 75% it did not already own of property reinsurer Mid Ocean Ltd. Just over a week later, ACE announced it was buying privately owned property catastrophe reinsurer, CAT Ltd for $711 million in cash. Reportedly ACE was vying for the larger prize of Mid Ocean but was beaten out by EXEL, a suggestion on which ACE chairman, president, and chief executive officer Brian Duperreault declines to comment.

When complete, the Mid Ocean buyout will boost EXEL to powerhouse status with $8 billion in market capital, making it one of the 20 largest US-listed property/casualty insurance companies. EXEL president and chief executive officer Brian O'Hara says insurers will have to grow as consolidation and globalisation occurs in other industries. There will be fewer clients to go around and they will be much bigger with larger and more sophisticated needs.

Mr O'Hara says EXEL is on the lookout for more acquisitions in the US and especially in Europe, where it has a long established subsidiary in Dublin. EXEL will also boost its presence at Lloyd's through Mid Ocean's managing agency, The Brockbank Group, and its underwriting participation on Lloyd's syndicates. "With size being increasingly important, scale is necessary to compete," he comments. "Consolidation is going on at an ever increasing rate. There won't be any room at the table for small or medium sized companies."

EXEL will also develop products that integrate capital markets with insurance. That is one reason for bringing on board chief financial officer Robert Lusardi, who has previous experience in the catastrophe bond market and other financial products linked to insurance. "He believes the cat bond market is real and EXEL can do it," Mr O'Hara adds.

The past two years has sounded the drumbeat of EXEL's growth. In 1996 the company bought a 30% stake in investment management firm Pareto Partners. In early 1997, EXEL acquired 45% of the newly established political risk specialist Sovereign Risk Insurance Ltd (ACE has another 45% with the remaining 10% held by Risk Capital Reinsurance Company). A buyout of GCR Holdings Ltd (now XL Global Re), a 20% stake in Lloyd's syndicate manager Venton Holdings Ltd, the acquisition of the business of Connecticut based American Excess Insurance Association, of Railroad Association Insurance Ltd, a 75% stake in newly created Latin American Reinsurance and then the Great Lakes American Reinsurance Co purchase led up to the Mid Ocean deal and the transformation of EXEL.

The more recent purchases are the outcome of a year long review the company underwent when faced with declining premium volume, a huge capacity and increased competition. The company's gross premiums written after multi-year adjustments suffered a 37% decline to $441.3 million over the two years ended fiscal 1997. During that time the company's general liability business shrunk to half of its annualised premiums from 61% in fiscal 1995. The company was already moving into taking on more reinsurance business. Annualised premium grew by 134% to $144.3 million during the two years.

EXEL has been transformed from a simple risk transfer operation when it began in 1986 offering general and directors' and officers' liability to a company which also writes errors and omissions, property, multi-line reinsurance, marine, employment practices liability, financial products and political risk insurance. Aside from the Mid Ocean purchase, perhaps the most interesting move has been directly into the US market through the Great Lakes purchase. With Great Lakes, which it has renamed X.L. Insurance Company of America, Inc., EXEL plans to go after middle-market companies, ones which are less sophisticated about their insurance needs and rely heavily on brokers to put together risk management packages.


ACE's transformation in what the company calls its "new world strategy" began in 1996 with the purchase of Bermuda based property catastrophe reinsurer Tempest Re, which will now merge with CAT. Also in 1996 ACE also entered Lloyd's by purchasing its first managing agency, later increasing its presence with more purchases through ACE London to become the largest single underwriting group in the market.

ACE also formed political risk venture Sovereign Risk Insurance Ltd with EXEL and Risk Capital Re, and the company has entered an alliance with a World Bank agency to provide treaty reinsurance for their political risk operations.

By the end of financial year 1997, excess liability was down to 31% of the total $644.8 million in net premiums earned for the group, from the 63% the business earned in 1995. Net premiums earned from excess liability, its largest book, have fallen 30% over the same period.

In lockstep with EXEL's moves into the US, early this year ACE acquired Westchester Specialty Group, Inc., now operating as ACE USA. ACE will use its US company to target smaller companies with more frequency-oriented products, says Brian Duperreault. In April, ACE USA established two new product divisions: warranty and E&O and announced that it could offer large blocks of capacity for excess liability and property in combination with its parent company. In the second quarter to March 31 this year, ACE USA contributed $38.7 million in net premiums. Another addition this year is ACE Insurance Company Europe Ltd, incorporated in Dublin to write business throughout the European Union.

Mr Duperreault is upbeat about the technological expertise the CAT acquisition brings to the group. He believes ACE will now move fully into developing financial lines of business through its US and European operations. ACE, for example, recently set up a captive reinsurance facility, after grabbing expertise from Sphere Drake Underwriting Management (Bermuda) Ltd.

"We have been trying to diversify the company by product line and by geographic presence," he says. "We are not trying to do everything. This is a targeted diversification." As to whether ACE and EXEL would go one giant step further in the transformations and merge, both Brian Duperreault and Brian O'Hara have ready denials. Market rumours about such a merger began after the two companies entered an agreement to purchase land together in Bermuda. The fact is a prime piece of land became available, and in a relaxation of its policy the Bermuda government allowed two foreign controlled companies to purchase land. They are now in the process of building separate headquarters.

Mr O'Hara believes such a merger would not bring any major cost savings. The two business cultures are different. "We have very independent plans," he says. "I do not think it is good for Bermuda to have one monolithic company."

Ahmed ElAmin is a business reporter for The Royal Gazette in Bermuda. Tel. (1) 441 295 5881; fax (1) 441 292 2498.