issue of The Bottom Line, available now throughout Bermuda at no charge as a service of Crown Communications and The Royal Gazette Ltd.

A man in California, whose name is Al Nino, has been receiving a lot of angry calls from people fed up with his weather.

Among those less upset by the dramatic effects of the real El Nino weather system, surprisingly, are the insurance companies who are paying for the damage done. Despite the winter's storms and continuing diverse effects, this otherwise relatively mild winter in North America and Europe has so far resulted in fewer major claims than were statistically to be expected.

Insurance companies, in the main, are in exactly the position you'd think insurance companies would want to be in: several years of solid profits, accompanied by a relatively low level of claims. Inflation is under control, holding cost increases to a minimum. A seemingly never-ending bull market has occurred in investments of all grades.

As the Bermuda-based chief executive officers line up to sign the deeds for those imposing homes they have always yearned for, you might forgive them for saying to themselves: "It doesn't get much better than this. Even if rates have dropped 30 percent in the past two years, even if it all goes horribly wrong next year, the 1990s have been very good to the company and the industry. And to me.'' What the CEOs actually think is nothing like that. Although insurance is an industry which looks at the past to predict the future, there is no sense of unanimity as to what is likely to come next. Opinions range from the apocalyptic to the benign and the idealistic. Hardly anyone has a firm idea what the last year and a half of the Y1K will contain, let alone where their industry is heading in Y2K.

Looking at the recent past, reading insurers and reinsurers' financial statements over the past few years, you'd think it was time to pour the champagne.

In the few short years since the catastrophe companies came to the Island, total assets in the Bermuda insurance sector have increased from $70 billion to more than $100 billion. Total capital and surplus in the former "resort market of last resort'' is ahead by just about 50 percent in the same period.

Lloyds has seen the worst of times and is recovering. The major North American and European companies are, mostly, in good shape and are forecasting better to come. Overall, insurance markets have never been healthier. Break out the bubbly? Apparently not.

Mid Ocean Ltd. chairman Robert Newhouse and president and CEO Michael Butt stated the situation succinctly in their 1997 annual report: "The year has been one of contradictions for the industry. On the one hand, it has been a year of exceptional profitability and, on the other, the fundamentals for the industry have deteriorated. Consolidation of clients, intermediaries and competitors continues apace.'' The present market experience, Newhouse and Butt wrote, "is not a new phenomenon, merely the repeat of supply and demand adjustments in an industry where pricing has historically been based too much on market forces, as opposed to objective underwriting criteria reflecting the true cost of product (capital and exposure).'' Almost everyone agrees change must come. Where everyone disagrees is in timing and degree.

Some sniff the aroma of an approaching millennial Armageddon. Brian O'Hara, CEO of EXEL Ltd., told the Bermuda Insurance Institute in the early days of March: "Those whom the Gods would destroy, they first send 20 years of good earnings.'' O'Hara's comment, in context, was an alarm call to those of his colleagues who underestimate the heights they have attained amid a continuing stream of superb industry earnings. He pointed out that "of the 100 largest US companies in 1917, we count only 15 surviving today. The other 85 went bankrupt, were liquidated, were acquired or were left behind.'' Whatever combination of factors saw off those companies before their time, the current insurance industry malaise, vertigo aside, is competition.

"The Lloyd's market is now experiencing intense competition in all its major disciplines; the greater the market share of any class of business Lloyd's enjoys, the greater seems to be the competition in that class,'' wrote Mark Brockbank of the Brockbank Group Plc, in new owner Mid Ocean Ltd.'s annual report.

The cause of competition is, simply stated, over-capacity. That fortuitous combination of rising markets has left the insurance industry with more capital than it knows what to do with. Behind the numbers lies an industry intent on pursuing a range of solutions which, between them, must result in a redefinition of the entire risk management industry.

In the world of insurance, soft is a four-letter word. The present soft market has affected almost every corner of the global insurance industry. In some sectors, rates have dropped by as much as 30 percent in the past two years alone.

"I wouldn't be surprised if a number of the commercial insurance companies, not including the Bermuda specialty insurers, are writing premiums at or below cost,'' says a London broker. "The result can only be, sooner or later, an inability to meet claims made against that book of business. What goes up must come down. The question is: How hard is the landing going to be for those companies who are selling their product at a discount on cost and banking on an extended run of relatively benign loss experience?'' O'Hara's stern warning represents one end of a spectrum of opinion. At the other is the dwindling "new paradigm'' brigade, who argue that globalisation of markets has led to a new and permanently stable (and perfect) set of economic conditions -- in other words, what goes up doesn't necessarily have to come down any time soon.

The view from the middle is that the middle cannot hold. "There is dynamic tension between the needs of the capital invested in the industry and the needs of the industry at this time,'' says a New York insurance analyst.

"Dynamic tension leads to and is, in turn, caused by, change. If the markets themselves prove resistant to change, capital will refashion itself to meet its own needs. Companies which fail to acknowledge this are following a dangerous course.'' In plain English: change or die.

"Our industry has reached the stage where the question is no longer: 'Is a point of correction coming?' The question now is: ' When is a point of correction coming?','' says the CEO of a large Bermuda-based international insurer. "When is it coming? Your guess is as good as mine. But there is, I think, a consensus developing that rates can't fall much further.'' A New York underwriter explains the pressure the current situation places on him: "I have to write business. We don't have volume quotas, but we do have targets. I know I'm seeing deals other guys have passed on. I've turned down a few myself. But I have to write business; it's what I do. So I write the best business I can find. Everyone's getting squeezed, but it doesn't mean you commit suicide by writing at a loss.'' A year or two back, a few companies distributed to their shareholders as dividend a chunk of their excess-to-requirement earnings. Returning excess capital to shareholders is an investor's dream come true: billion-dollar dividends.

The problem is that stockholders don't want it back just at this moment, says an investment analyst for a London merchant bank, Mark Lane.

"The last thing the big investment boys need is another billion dollars of capital with nowhere to go,'' says Lane. "They have other placement problems.

The Far East markets are out of sorts. New US Federal Government borrowing is shrinking, making it harder to place domestic Government-grade funds. At a time like this, the traditional insurers are geared to building reserves.

Their shareholders - pension funds, mutual funds and other institutional holders -- have no problem with deferring gains to build value in a year when they already have their quota of gains.'' Companies so stuffed with capital that they cannot give it away often join O'Hara's list of the dearly departed, snapped up by more aggressive competitors. Driven by the need to invest their surplus and thereby improve earnings, they improve the top and bottom lines by acquiring other companies and their market share. The practice does not make for smooth lines on the charts, but forward momentum can be maintained, and often enhanced, by buying those companies which, uncertain how to grow, simply grow fat until a player more alert to opportunity swallows them whole.

ACE, and others, have gone the route of acquisition, and are willing to go further in that direction.

In the past couple of years, ACE has purchased Tempest Re and significantly increased its involvement in Lloyd's to become the largest single underwriting group in the Lloyd's market. In London, the stuffy Norwich Union was the most hotly tipped takeover candidate early in March. Suddenly, insurance companies are sexy.

Mergers and acquisitions in other industries, such as the global banking business, are creating a race of giant companies with giant insurance needs.

The trade blocs thrown up by the globalisation of markets offer the truly huge insurer truly huge opportunities.

How huge? American International, the leading insurance and financial services company in the world, has assets of about $150 billion.

Last year, the merger of J&H and Marsh McLennan -- referred to in the industry as "Marsh Attacks!'' -- was the hot story.

"You can do things with a capital base of $50 billion that you cannot do with, say, a billion or two,'' says a local banker. "I don't just mean the obvious things, I mean that at sufficiently advanced levels of available capital, an insurance company may only be an insurance company to the extent that it has a book of insurance. What the company is, in reality, its core competence, is an investing machine.''