The insurance industry has entered a period of sustained consolidation, both domestically and internationally, as a result of the September 11th attacks, according to a year-end forecast by the Transaction Services group at PricewaterhouseCoopers (PWC).

Bill Chrnelich, a Transaction Services partner, said: "The industry will emerge stronger from this stressful period, but with fewer companies. The September 11th terrorist attacks are clearly accelerating the ongoing consolidation and globalisation of the insurance industry.

"What happens in the Mergers and Acquisitions (M&A) market over the next 12 months will determine to a large extent how well the industry is capitalised and how well it is prepared for new disasters over the next five years."

Mr. Chrnelich highlighted several key aspects of the group's forecast including the fact that the weak will not survive.

The report says that with industry estimates upwards of $50 billion to $70 billion in losses from attacks on the World Trade Center and the Pentagon, weaker players - and those with a disproportionate share of the claims - may become targets for takeovers, workouts or bankruptcies over the next six to twelve months.

The report also said that depleted capacity will dictate developments. In the wake of Hurricane Andrew, the second most expensive catastrophic event in the insurance industry's history, and the earlier capacity crisis in liability coverage, several new companies were formed through M&A activity to take advantage of soaring premiums and demand for capacity. These include Bermuda-based Mid-Ocean, ACE Ltd., XL Ltd, Tempest Re, and Partner Re.

The report also said that capital flowing into insurance companies since September 11th has similarly spawned several new ventures, some based in Bermuda including Axis Specialty, a $1 billion aviation, war and political risk insurer and reinsurer formed by Marsh & McLennan; Allied World Assurance Company Ltd., a property and casualty joint venture funded by AIG, Chubb and Goldman Sachs; DaVinci Re, a property catastrophe reinsurer launched by RenaissanceRe and State Farm; the $750 million stake taken by private equity firms Warburg Pincus and Hellman & Friedman in the new reinsurance arm of Arch Capital; a $1.3 billion capital offering by ACE Ltd , and in foreign jurisdictions, a new venture sponsored by Zurich Financial and AEON with $1.2 billion of projected capital, and the expected IPO of Converium.

The difference between the aftermaths of Hurricane Andrew and September 11 is that the average capitalisation has more than doubled, reaching about $1 billion, compared with $250 to $500 million after Hurricane Andrew. Clearly financial strength will be a big factor in winning the confidence of insureds and reinsureds.

The report also says that cross-border deals are looking better as European companies are keeping a close watch on their American peers, with takeovers possible as the harder hit firms become attractive targets.

The PWC report also highlights the fact that, despite a clear regulatory go-ahead, banks are not buying insurers in a big way, preferring to focus on the fee-generating side of the business by acquiring insurance agents who offer products that can be funnelled through their branch networks.

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