natural disasters of late, the `good news' signals a possible decline in catastrophe premiums. Ahmed ElAmin reports.

The Standard & Poor's (S&P) rating service has issued a new report on Bermuda which predicts CAT Ltd, International Property Catastrophe Reinsurance Co.

Ltd., LaSalle Re, and Renaissance Re may be fat targets for takeovers as merger-mania continues in the industry.

The Bermuda Market Report says the greatest challenge facing insurers based on the Island will be the management of risk and expansion.

With declining premium rates and the build up of capital, Bermuda catastrophe reinsurers have been expanding their activities abroad, either though acquisitions or by developing new lines of business.

"Prudently absorbing the acquisitions and efficiently managing branch expansion remain the key issues facing the Bermudian reinsurers as they seek to compete in a global market,'' S&P states in the Bermuda Market Report, released this week.

While non-catastrophe premiums are growing, expenses are also growing. "The catastrophe reinsurance industry's expense ratio remains better than the large multi-line reinsurers, but with growth, the Bermudians will increasingly be pressed to hold that advantage over traditional insurers,'' S&P states.

"Further consolidation is likely with CAT Ltd., IPC, LaSalle Re and Renaissance Re retaining a focus on the property excess market that may make these companies attractive acquisition candidates for large multi-line reinsurers.'' The 1997 premium rates have declined by up to 30 percent in some markets such as the UK. Moderate reductions elsewhere, such as in Japan and Latin America, have caused some rates to fall below required returns which S&P believes should lead reinsurers to back out of those markets.

"Bermuda catastrophe reinsurers may begin to suffer from too much good news as windstorm and earthquake activity has been surprisingly mild since their genesis four years ago,'' the report states. "...However, if the `good news' continues and this sector avoids the large catastrophe loss for yet a few more years, catastrophe premiums will surely decline to rates experienced prior to Hurricane Andrew. Such a scenario will prove difficult for the catastrophe reinsurers as capital becomes underutilised and risk exposure increases.'' The 21 percent average annual return on equity by the Bermuda-based catastrophe reinsurers has led to a sizable buildup of capital even though the companies have paid large dividends and made stock repurchases.

The Bermuda-based companies' profitability has in turn encouraged competitors to up the heat on the market. The paradox for Bermuda's reinsurers lies in their accumulation of capital and the preservation of their healthy returns, according to the report.

"To their credit, the catastrophe reinsurers have actively managed capital and have posted excellent returns to date,'' it adds. "Initial efforts were fairly straight forward in the form of extraordinary dividends paid by Global Capital Re and LaSalle Re.'' Most of the reinsurers have returned some of the excess capital by repurchasing stock. Some have diversified by buying other companies or by investing in Lloyds.

"In general, Standard & Poor's believes the investments compliment the Bermudian operations by providing access to additional underwriting expertise and a world-wide distribution force that brings a diverse mix of business,'' the report stated.

"...Only time will tell if the catastrophe reinsurers have paid too much for access to this large market.'' S&P analyst Grace Osborne said Bermuda's insurance market had benefited from its favourable regulations allowing the companies flexibility in writing high excess liability coverages.