ElAmin takes a peek at the deals and counterdeals during the fight for prized reinsurer Mid Ocean Ltd.

Documents filed by EXEL Ltd. with the Securities and Exchange Commission (SEC) reveal how close the company came to losing catastrophe reinsurer Mid Ocean Ltd. to rival ACE Ltd.

The jostling for position between insurers in the Bermuda market -- one which is still continuing -- was evenly balanced. But in the end EXEL won, agreeing to pay $2.1 billion in stock or $76 a share for the 73 percent of Mid Ocean it didn't already own.

The SEC document gives an insight into the corporate forces and personalities at work in the Bermuda marketplace. The language may be somewhat dry, but there is a hint at the emotions which developed as EXEL saw itself being pushed out of a prized reinsurer.

The sale, which has to be voted on by shareholders. will boost EXEL into one of the 20 biggest property and casualty insurers whose stock trades in the US.

Meanwhile, ACE had to content itself by buying Bermuda-based CAT Ltd. for $711 million in cash as its entry into the property catastrophe business.

While The Royal Gazette has previously reported on market rumours ACE had attempted to snatch Mid Ocean away from EXEL, the document confirms what happened began with a simple telephone call by ACE's chief executive officer Brian Duperreault.

Mr. Duperreault and EXEL's president and chief executive officer Brian O'Hara have previously declined to comment about what happened.

EXEL's relationship with Mid Ocean began in 1992 when it became a founding shareholder in the catastrophe reinsurer. With a stake of 25 percent it was the largest shareholder. Others included J.P.Morgan & Co., Marsh & McLennan Cos, and the Kamehameha Schools-Bishop Estate, Hawaii's biggest institutional investor.

With its stake EXEL has had at least two representatives on the Mid Ocean board, including one on the executive committee of the board. EXEL's interest in Mid Ocean stemmed from a decision to enter the property catastrophe reinsurance business for strategic reasons.

Property catastrophe is generally low frequency, high severity in nature and "largely uncorrelated to EXEL's existing excess casualty insurance lines'', according to the document.

As part of the deal EXEL also agreed it would not increase ownership in excess of 30 percent, an agreement which was slated to last until May 1 this year or until Mid Ocean decided to consolidate with some other party.

By 1995 EXEL and Mid Ocean were pursuing separate diversification strategies and in some cases were increasingly competing against each other for business.

EXEL had formed a company to concentrate on specialty reinsurance.

In 1996 EXEL entered unsuccessful discussions to take over Mid Ocean. A low key tussle between EXEL and Mid Ocean began.

"None of these discussions resulted in substantive negotiations, and at a meeting on September 12, 1996, the Mid Ocean board determined that such a transaction would not be in the best interests of Mid Ocean.'' With EXEL acquiring control in 1997 of GCR Holdings -- a Bermuda-based reinsurer in direct competition with Mid Ocean -- the conflicts became more apparent. EXEL and Mid Ocean were also competing thorough subsidiaries directly in the Lloyd's of London market.

As a result Mid Ocean's chairman Robert J. Newhouse, Jr., and President and Chief Executive Officer Michael A. Butt "became concerned about potential conflicts of interest on the Mid Ocean board''.

EXEL's chairman Michael Esposito, Jr. and president and chief executive officer Brian O'Hara both sat on the Mid Ocean board. Mr. O'Hara also sat on the board's executive committee, responsible for strategic planning.

One can gather from the statement Mr. Newhouse and Mr. Butt were afraid Mr.

Esposito and Mr. O'Hara might be using their insight into Mid Ocean's strategy to help EXEL compete in the market.

In September 1997 Mr. Esposito and Mr. O'Hara were asked to reduce EXEL's ownership in Mid Ocean and their representation on the board. The two EXEL representatives refused to step down from the board but said they would follow certain procedures to avoid a conflict of interest.

"Such procedures included recusal by Messrs. O'Hara and Esposito from deliberations and voting on matters relating to strategy and areas in which the business of EXEL and Mid Ocean overlapped,'' the document stated.

The two also said they would look at options concerning the Mid Ocean stake.

By January this year "no significant progress had been made in this regard'', the document stated.

Then on January 8 ACE's Mr. Duperreault made the telephone call that set events in motion. He telephoned Mid Ocean chairman Mr. Newhouse with an offer to begin negotiations for a combination of the two companies.

A week later Mid Ocean and ACE signed a confidentiality agreement. By February discussions had progressed to the point where ACE was to pay about $67 a share. Mr. Butt then told the board of the possible transaction, and the board gave authorisation for the negotiations to go ahead.

The price offer rose to $70 a share by February 17. J.P. Morgan then contacted EXEL and told the company of the transaction. EXEL rejected the offer on the grounds the price was too low.

The Mid Ocean negotiators decided to go ahead anyway. They met with ACE on February 24 to talk about how to do the deal without EXEL's consent.

At the meeting ACE told Mr. Newhouse and Mr. Butt the deal was off. The reasons are left unstated in the SEC document. However Mid Ocean is registered as a company in the Cayman Islands. Under Cayman law the deal would have required 75 percent of shareholders to vote in favour of the takeover.

By that time EXEL held about 27 percent of the shares. The company could have held out for a much higher price to prevent a competitor from falling into another company's hands.

J.P. Morgan then informed EXEL on March 2 Mid Ocean was looking to go ahead with other deals without the consent of the company. Mr. Butt again also "discussed'' with Mr. O'Hara the issue of EXEL's presence on Mid Ocean's board.

On the morning of March 3, EXEL's senior management met and decided the company would not support a Mid Ocean merger with anyone else. The idea of an EXEL takeover was also discussed. Mr. O'Hara then told Mid Ocean it was willing to offer up to $74 per share in cash and shares.

The Mid Ocean board agreed to such negotiations with the proviso EXEL be prepared to offer a share-for-share exchange without a cash component. By mid-March negotiations had proceeded to where the parties were discussing the details of the amalgamation. On March 14 the proposed deal was made public.

"The resulting company is expected to benefit from the combined financial resources, management and personnel of EXEL and Mid Ocean, will be better positioned to compete effectively in an increasingly competitive industry and will be better able to capitalise on worldwide growth opportunities in the insurance and reinsurance industry,'' the SEC document states.

Meanwhile Mid Ocean's executives get taken care of in the deal. Mr. Butt will get severance pay of $3.5 million at the end of this year. He'll also get $675,000 bonus for the current fiscal year. He will also be paid $535,000 a year as a paid consultant for two years.

Mr. Newhouse will get severance pay of $1.4 million and a bonus of $750,000.

He will also receive $250,000 as a consultant for one year.

EXEL is holding a shareholders' special general meeting August 3 to vote on the purchase. Mid Ocean shareholders will vote soon after. They'll get $76 worth of EXEL's shares for each Mid Ocean share. Or they can elect to receive cash, as since the deal was announced Mid Ocean's stock has risen to $84, a 33 percent gain from $63 when the deal was made public in March.

TAKEOVER COUNTDOWN January 8, 1998: ACE CEO Brian Duperreault telephones Mid Ocean chairman Mr.

Robert Newhouse with an offer to begin negotiations for a combination of the two companies. It leads to Mid Ocean and ACE signing a confidentiality agreement; February: Tentative arrangement for ACE to pay about $67 a share; February 17: Price offer rises to $70 a share, but EXEL later rejects it, saying the price was too low; February 24: Mid Ocean negotiators meet with ACE to discuss how to clinch the deal without EXEL's consent. ACE calls off the deal; March 2: Shareholder J.P. Morgan tells EXEL that Mid Ocean was prepared to make other deals without their consent; March 3: EXEL's senior management decided the company would not support a Mid Ocean merger with anyone else and the idea of an EXEL takeover was discussed.

EXEL CEO Brian O'Hara told Mid Ocean it was willing to offer up to $74 per share in cash and shares. The Mid Ocean board agreed to the talks, provided EXEL offer a share-for-share exchange without a cash component; Mid-March: The parties discussed the details of an amalgamation; March 14: The proposed deal was made public.