t was the thing to do in the late 1990s. Globalisation was the buzz word and expansion and diversification the name of the game. Markets were high, and things were looking good.

Everyone from small family businesses to huge multi-nationals had the fever ? the returns seemed high, the risks few.

So it seemed the natural thing for aspiring insurance companies ACE Ltd. and XL Capital to want to move on up to the world stage to become one of the big players.

Way back in the early 90s, both companies had begun to think big and were diversify their lines and looking at ways of expanding.

But it was not until the late 1990s that ACE and XL went global doing what seemed normal at a time the insurance industry was chasing growth mainly through acquisition and sometimes by innovative product development in an effort to survive in a tough marketplace.

The drive to succeed and capture customers was behind the acquisitions like the $1 billion paid by XL for NAC Re, Berkshire Hathaway $22 billion stock swap for General Reinsurance Group and ACE?s buy-out of the Cigna Corporation for $3.45 billion.

Low revenue growth in the traditional insurance markets, if at all, was driving companies to consolidate within and outside the industry. At the World Insurance Forum back in February 1999, a panel of top chief executives discussed the adjustments the industry was making in response to globalisation, and the increasing use by clients of alternative ways of covering their risks.

?Growth through acquisition is definitely the main trend in the industry,? said XL director Michael Butt .

?You can?t grow by writing business so you have to grow through acquisition or through convergence ? which is acquisition outside the industry into the banking and financial sector. The challenge is to make the scale work.?

In the same meeting XL?s president and chief executive officer Brian O?Hara said companies were going to have to go big to meet the needs of their large, global clients and size was necessary in order to service such clients.

AON Corp. chairman, president and chief executive officer Pat Ryan said: ?Scale is absolutely critical in globalisation through acquisition. We think the strategy is sound.

It?s in the execution, the cultural clashes in cross-border mergers that?s the challenge.?

But no where among the buzz words ?convergence?, ?one-stop shopping?, and ?integrated risk management? was a mention of the huge problem looming ? asbestos. So far not a squeak had been heard about asbestos in conjunction with insurance. ?At the time no one thought asbestos would become a big issue,? said analyst Mark Lane of William Blair & Co. ?The asbestos issue was very difficult to anticipate and nobody had the foresight to see what would happen here.?

It was only in 2000 that asbestos started to be heard in insurance circles after companies started to go bankrupt because of the huge tort cases brought against them. Insurance companies started to increase their reserves in 2001 ? and it has been going on ever since.

Asbestos claims sent shivers across an insurance sector ? already battered by the worst bear markets in decades and ACE and XL were no exceptions.

Both were exposed and had to increase their reserves in the light of the ever increasing amounts being looked for by those damaged by the toxic fumes produced by asbestos.

XL has been walking wounded since it said it was going to take another $160 million after tax hit for the third quarter this year, and may still have to increase its reserves to deal with the spiralling asbestos claims. Mr. O?Hara said when they made the announcement: ?As we have previously noted, the underwriting years in the late 1990?s were among the worst in the industry?s history for North American casualty business. Many primary insurers are continuing to see loss development beyond historical patterns due to the marked expansion of liability in the US tort system. The claims stem from the former NAC Re book, primarily from general liability, medical malpractice, professional lines and surety.

But he pledged to get to the bottom of the matter.

?I am personally leading a review of this book of business, which will include an intensive claims audit and review of the ceding company claims files that will be completed by year end. I intend to fully address our exposure to the 1997 through 2000 North American casualty reinsurance book written by the former NAC Re so that it will not adversely affect our financial results in 2004 and beyond.?

Analysts came down hard on the company and its shares have gone from a 52 week high of $88.87 to a new 52 week low of $63.49 and were yesterday afternoon trading at $68.52.

ACE also had considerable exposure to reinsurance recoverables and significant asbestos and environmental reserve exposure that resulted from the ACE INA acquisition and the 1998 acquisition of Westchester Specialty. In 2002 ACE put up $514 million in additional reserves to deal with its liability, but is less exposed because it took out reinsurance on its new business acquired when it bought Cigna.

In February this year ACE said that it will take a $354 million charge and add $2 billion to its reserves in its fourth quarter to cover asbestos-related claims.

ACE issued a release ahead of their full fourth quarter results stating that after internal and external reviews of its asbestos and environmental reserves, it has decided to boost its reserves by $2.178 billion.

At the time ACE said that this amount is offset by $1.860 billion of reinsurance, including $533 million from a reinsurance agreement with National Indemnity Company, a subsidiary of Berkshire Hathaway. ACE?s net reserve addition will be $318 million, equivalent to a net after-tax charge of $354 million. But analysts have been kinder to ACE ? mainly due to its reinsurance contract. A.M. Best said this year it considered the $2.2 billion (gross)/$514 million addition to asbestos reserves recorded in 2002, adding it was comfortable with the adequacy of asbestos reserves.

So was it a good idea in the end for the two companies to go global and expose themselves to this kind of class action suit?

One top analyst, who asked not to be named in this story, said: ?I am more for what ACE did rather than XL. XL has some lingering issues, and until they get that under control there will be problems. I fully expect there to be another charge in the fourth quarter.?

The analyst said that at the time it was the thing to do, to take on any latent liability. Nowadays, with new changing markets, the new wave of Bermuda insurers have simply refused to take on any business that may have lingering liabilities from the past ? a far cry from the giants lumbered with the asbestos crisis.

But the analyst added: ?Even with the additional asbestos liability ACE would not have been able to create a global franchise without the Cigna acquisition.?

Another said that ACE buying out Cigna made ?an awful lot of sense?. ?Much of their earnings now come from their purchase of Cigna. And while they have the asbestos claims, it is not killing them.?

And the analyst said that at the moment any claims were far enough off from being settled that in fact tort reform might be brought in before any claims really hit home. He said: ?The acquisition of Cigna has impacted their GAAP results and they have a benefit from what occurred globally in the insurance world in the past four years. And they would not have benefited nearly as much without the Cigna acquisition under their belt.

?XL is trickier. There are very large holes in what they have bought and they have not done filling the holes. I am not able to say yet that it had not been a great acquisition. The acquisition has not given them a lot, but hen they didn?t acquire a company three times their size (as ACE did).

?There are different dynamics, but at the end of the day, if you asked ACE if they would still do it, they would say yes about Cigna. I am not so sure XL would say the same about NAC Re.?

The analyst said that XL has not done so well on some of the other businesses they bought, such as Intercargo and he said the Lloyds business they bought ?has given them more headaches? that any profit they may have reaped.

But he said that it was very hard to grow organically at the end of the 1990, and acquisition was seen as the way to go.

?They had to find ways to grow and wanted to diversify and it is unfair to say that they have not been successful. They haven?t had a lot of time. So it is difficult to say for sure how they have done, as they have only had had four years until now. Maybe in five years time we will have a clearer picture.?

And he said that the growth of the new wave of insurance companies in Bermuda had been growing through acquisition, but in a different way. ?It is more driven by the market place. In this environment they don? t need to buy companies to grow, so they have been able to buy without the liability. They haven?t needed to expand as they are growing very nicely on their own.?

When asked if ACE and XL should have gone global, despite the lingering asbestos claims, Mark Lane, analyst with William Blair & Co. said: ?I would say that it is an interesting question and that the success of any acquisition needs to be assessed over a very long period of time and for both companies it is very unclear whether it has been proven a success.

?Having said that, ACE improved the quality of its franchise by buying Cigna and it gave the company a global platform. The asbestos issue has still not completely run its course. If there is federal legislation in the next year or two it would quantify the impact and that would make things clearer.?

But he described the 1999 NAC Re acquisition by XL, as ?disappointing?.

?They took material charges at the time they completed the deal and took material charges in the next three years and there is a material charge expected next quarter, but it remains to be seen if we will get that. So NAC has certainly been disappointing.?

Mr. Lane said that any tort reform put before Congress would clarify the matter in the short term and make it easier to see what the companies are really worth.

And he suggested it was a little unfair that XL was getting so much flak for its acquisitions.

?In 1999 when ACE bought Cigna it got reinsurance of $1.25 billion with Berkshire Hathaway to protect themselves. And they did this when asbestos was not really an issue. If they had not done this, they would have been in a lot worse position than XL is now.?

And he said that if significant legislation is brought in in the next two years, it would take away the asbestos problem and allow investors to see the true worth of the companies.

?If you could eliminate the asbestos risk, it would be something. It would allow people to focus on the industry value and not get caught up in asbestos,? he said. Mr. Lane added: ?For XL the acquisition has been a disappointment. They didn?t need to do that deal and probably did it too early. But it was very difficult to anticipate what did happen and then what has happened to the economy around the world since... with 9/11, WorldCom, Enron, Arthur Andersen, the markets collapse and everything else.

?But this is a real negative mark against management (of XL). They have done a great job with XL over a long period of time, and it is unusual to see XL struggle with business. But it will take some time to restore their credibility with the investment community.?