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Ace, XL prepare to address challenges of growth

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Ace Ltd. and XL Group P.L.C., born of the mid-1980s liability crisis, have become successful global players largely through acquisitions, though they face several challenges resulting from their latest purchases.

Ace Ltd., formed in 1985, and XL Group P.L.C., originally EXEL Ltd. when established in 1986, began as policyholder-owned facilities to offer excess liability and directors and officers liability coverage.

They also helped jumpstart the alternative Bermuda market.

Now public companies, both are growing thanks to major acquisitions.

Ace earlier this month announced a $28.3 billion deal to buy Chubb Corp. Ace's earlier purchases include Corporate Officers & Directors Assurance Ltd. in 1993; Tempest Reinsurance Co. Ltd. in 1996; and Cigna Corp.'s global property/casualty business in 1999, which gave the insurer an international platform.

XL boosted its market share most recently with the $4.28 billion deal in May to acquire Catlin Group Ltd. Earlier purchases include property catastrophe reinsurer GCR Holdings Ltd., the holding company for Global Capital Reinsurance Ltd., in 1997; Mid-Ocean Reinsurance Ltd. in 1998; and Winterthur International in 2001. In 1999, XL merged with NAC Re Corp.

Both also have acquired a significant presence at Lloyd's of London. With the purchase of Catlin, XL owns the market's largest syndicate, syndicate 2003 that provides more than 30 lines of coverage.

Ace and XL have been largely successful, said Jim Auden, managing director of insurance at Fitch Ratings Inc. in Chicago.

When the liability crisis ended, the companies “had very good results and made money and retained that capital, and that allowed them to take advantage of other opportunities down the road,” Mr. Auden said.

“They came in without a lot of legacy issues in terms of culture and with fresh management and I think, as a result, they were able to be more nimble” than other insurers, said John Wicher, principal at John A. Wicher & Associates Inc. in San Francisco. “With the appropriate safeguards in place, they have not been afraid to be aggressive and to reach out for growth.”

Still, they have stumbled along the way.

XL acquired legacy liability exposures with NAC Re and Winterthur that led to more than $1 billion in charges and reserve increases in 2004 and 2005.

Ace managed its exposure to past-year liability losses from Cigna's property/casualty business through a then-innovative reinsurance deal with Berkshire Hathaway Inc. The deal involved Cigna establishing a separately capitalized runoff entity, which purchased reinsurance from Berkshire.

But it ran into trouble when it was one of several insurers caught up in bid-rigging allegations by then-New York Attorney General Eliot Spitzer, the resolution of which cost Ace more than $80 million in various states.

In addition to having strong management teams, “each of these companies has demonstrated an ability to maintain a very clear vision in terms of maintaining strong (returns on equity), only doing deals that make sense,” said Robert Hartwig, president of the New York-based Insurance Information Institute Inc.

“Even though they stand true to their own vision and they're disciplined, they're still receptive to the risk manager's needs,” said Carolyn Snow, director of risk management at Louisville, Kentucky-based health care provider Humana Inc.

Both are “pretty good at paying attention to their customer, making sure the customer does get their claims paid on a timely and accurate basis as needed,” said William M. Zachry, vice president of risk management at grocery store chain Safeway Inc. in Pleasanton, California.

Ace and XL have “developed the insight and expertise to write high-exposure, primary business,” said Warren Mula, CEO of Aon Risk Solutions' retail broking unit in Chicago.

“When you consider how many carriers are in existence today that truly write primary global property and casualty business, there's not all that many,” he said, saying there are about five to six such insurers.

Integrating Chubb and Catlin will be a challenge, but “I think they'll come out fine,” said Safeway's Mr. Zachry.

Ace and XL face the complexity of managing operations and risk worldwide, with different regulatory regimes, capital demands and competitive environments, said Alan Murray, senior vice president at Moody's Investors Service in New York.

“It's easier to be entrepreneurial when you're smaller. When you become bigger, it's more difficult to stay entrepreneurial” and continue to have success, said Rob Yellen, New York-based executive vice president of Finex North America, a unit of Willis Group Holdings P.L.C.

“Are they going to be able to continue? I think they will,” said Mr. Yellen. While it does not mean there will not be bumps in the road “they're on the right track.”