HAMILTON, Bermuda-X.L. Insurance Co. Ltd. is continuing its drive to diversify with the purchase of property catastrophe reinsurer GCR Holdings Ltd. for $637 million.

The deal will give X.L. a quick route into what has been a hugely profitable line of business and further decrease its reliance on the soft excess liability market for premium growth, analysts say.

GCR will benefit by becoming part of a much larger company with more than $5 billion in total assets to stand behind its policies, analysts say.

The purchase will also make X.L. even more closely resemble its Bermuda rival and occasional partner ACE Ltd., which bought another catastrophe reinsurer, Tempest Reinsurance Co. Ltd., last year.

Analysts say these deals could signal further merger and acquisition activity in Bermuda.

One main benefit of purchasing GCR, the holding company for Global Capital Reinsurance Ltd., will be the diversification it will bring to X.L., said Jay Cohen, an analyst at Merrill Lynch in New York.

"It will give X.L. some immediate diversification, and it will impact its earnings favorably" he said.

Under the terms of the offer, EXEL Ltd., the holding company for X.L., will pay $27 a share for the 95.1% of the shares in GCR that it does not already own.

Although X.L. already has a reinsurance subsidiary, X.L. Reinsurance Co. Ltd., its reinsurance business is substantially different from GCR's. X.L. Re frequently writes multiyear business and finite risk business as well as quota share and excess-of-loss reinsurance.

GCR's primary focus is property catastrophe reinsurance, though it has diversified to cover other lines, such as excess property, marine and aviation, and satellite reinsurance.

"Given GCR's client base, it gives X.L. the opportunity to potentially cross-sell some of its insurance and reinsurance products," Mr. Cohen said.

The purchase also gives X.L. immediate access to a new line of business that has been very lucrative for the eight specialized property catastrophe reinsurers that set up in Bermuda in 1992 and 1993, said Craig Elkind, associate director at Standard & Poor's Corp. in New York.

"You don't have to buy a company to get into the catastrophe business, but if you want to get the preferred accounts and a geographic spread it may save a lot of time. . .it creates a global multiline insurance and reinsurance company," he said.

GCR will likely be combined with X.L. Re to create one reinsurance operation within X.L.

X.L. executives could not be reached for comment, but in a taped conference call with stock analysts, Brian M. O'Hara, chairman and CEO of X.L., said the combined companies would have about $750 million in capital, which would likely be reduced to about $500 million if rating agencies approved of the reduction.

The purchase of GCR is a better deal for X.L. than the purchase of Mid Ocean Ltd., another Bermuda catastrophe reinsurer in which X.L. has a substantial shareholding, Mr. O'Hara said in the conference call.

GCR is largely a catastrophe reinsurer, whereas Mid Ocean is a more diversified reinsurer, and through its interest in Lloyd's of London, it writes a substantial amount of excess liability business in competition with X.L., he said. Mr. O'Hara has a seat on the Mid Ocean board and is awaiting its reaction to the GCR purchase.

X.L. was considering purchasing a property catastrophe reinsurer when it bought 4.9% of GCR last year, Mr. O'Hara said.

"We were just waiting for a more sober attitude to prevail among the would be acquired (companies)," he said.

And although property catastrophe rates have substantially slumped since the highs after Hurricane Andrew in 1992, property cat reinsurance is still likely to be a profitable long-term business, Mr. O'Hara said.

The slump in property cat reinsurance rates will likely lead to further merger and acquisition activity among Bermuda companies, said Peter Wade, vp at Lehman Bros. Inc., in New York.

Well-capitalized cat reinsurers in Bermuda are finding that rates in their core business have declined to such a level that cat business alone cannot provide the return on equity their investors are seeking, he said.

And though most of the cat reinsurers have diversified into other areas, several of them will find it difficult to diversify as much as necessary given the overall competitive reinsurance market, Mr. Wade said.

"I think there will be more deals, and they will happen sooner rather than later," he said.

Future deals will likely involve insurers and reinsurers in the United States and Europe buying Bermudian companies or Bermudian companies reaching out in other markets in the same way that Partner Re Ltd. bought Paris-based Societe Anonyme Francaise de Reassurances earlier this year (BI, April 7), Mr. Wade said.

"Most companies in Bermuda are probably exploring their options right now," he said.