Consolidation has radically changed the property catastrophe reinsurance market in Bermuda, where only four of an original eight reinsurers still operate independently.

Additional change has been stimulated by the soft market. Nearly all of the cat reinsurers have changed, or are trying to change, their portfolios of risks to include substantial amounts of non-property business.

Other factors may help change the market even further as the cat reinsurers try to buy and sell capital markets-linked products.

Still, among all the change remains one constant: Bermuda is now a respected and established reinsurance market.

Despite reductions in profit margins and revenues compared with their early days, the cat reinsurers continue to attract some good business and offer excellent security, reinsurance brokers say.

The Bermuda property catastrophe reinsurance market is now firmly entrenched as a well-disciplined market, said Willis King, vice chairman at Guy Carpenter & Co. Inc. in New York.

"The Bermuda market is holding its own very nicely, and it's getting shares on a lot of programs. . . .You have a lot of capacity in a very small place, which is always helpful when you are trying to syndicate programs," he said.

The reinsurers in Bermuda also put a lot of emphasis on computer modeling of catastrophe exposures, and most of them have developed their own proprietary systems, Mr. King said.

"It's a good value-added market," he said.

Many reinsurers in Bermuda also show discipline in their underwriting by reducing their exposure on programs in the soft market, said John N. Gilbert, president of Holborn Corp., a reinsurance intermediary in New York.

"They are sending the message that they are only going to give so much and they are drawing a line in the sand," he said.

But the number of reinsurers in Bermuda is diminishing. The consolidation that has taken place throughout the reinsurance industry also has led to some expansions and contractions in Bermuda.

Of the original eight: Tempest Reinsurance Co. Ltd. and Cat Ltd. have been bought by ACE Ltd.; Global Capital Reinsurance Co. Ltd. and Mid Ocean Reinsurance Co. Ltd. have been bought by EXEL Ltd.; Partner Re Ltd. has greatly expanded its business outside of catastrophe reinsurance with the purchase of Societe Anonyme Francaise de Reassurances of Paris; Renaissance Reinsurance Ltd. has set up and bought primary insurers; and only LaSalle Re Ltd. and International Property Catastrophe Reinsurance Co. Ltd. remain little changed in structure.

The consolidation in Bermuda has had little effect, however, on the capacity available in the market, Mr. King said. Most of the reinsurers in Bermuda focus on different areas of the catastrophe market, so to date there has not been much redundant business, he said.

Many of the Bermuda reinsurers also have taken part in the consolidation in Lloyd's of London by buying managing agencies and becoming corporate investors. Those investments enable them to access business that might not be shown to the Bermuda market, Mr. King said.

The consolidation in Bermuda will likely continue, said Peter T. Pruitt, chairman and chief executive officer of Willis Faber North America Inc. in New York.

"There is a natural consolidation going on in the whole industry, and there will probably be some more in Bermuda," he said.

But being outside of the consolidation moves does help independent reinsurers attract and maintain business, said Guy D. Hengesbaugh, president and chief operating officer of LaSalle Re.

"We prefer to operate in this independent mode because, if nothing else, we are seeing an increase in interest in LaSalle from clients and brokers as the consolidation is occurring," he said.

Cedents like to have a spread of reinsurers, and while LaSalle is one of the smaller reinsurers on Bermuda, it still offers good security, with about $550 million in capital, Mr. Hengesbaugh said.

But the added interest has not counterbalanced the reductions in premiums at LaSalle Re due to the soft market. In 1997 LaSalle wrote about $180 million in premiums, and this year it expects to write about $165 million, he said.

One of the products of consolidation is X.L. Mid Ocean Reinsurance Co. Ltd.

The company arose out of the reinsurance operations of EXEL Ltd. and Mid Ocean Reinsurance Co. Ltd., the purchase of which EXEL completed this month. EXEL's previous reinsurance operations included the former Global Risk Capital Reinsurance Ltd., which was one of the original eight Bermuda catastrophe reinsurers.

The newly formed reinsurer will have capital of at least $1 billion, said Henry C.V. Keeling, president and chief executive officer.

Mid Ocean had the largest maximum line of the two reinsurers -- $30 million per program -- and that will be the normal maximum line of the combined company, Mr. Keeling said.

X.L. Mid Ocean still is reviewing whether it will keep the former Mid Ocean's policy of accepting business only through Bermuda brokers, he said. Mid Ocean was the only catastrophe reinsurer to maintain this stance.

The two reinsurers each had portfolios made up of about 35% catastrophe business.

One of the benefits of being part of a larger group is that the extra resources available to X.L. Mid Ocean will help the reinsurer enhance its coverages, Mr. Keeling said.

For example, it will likely be more involved in offering financial products, such as securitization of risks, and it may write more casualty reinsurance, he said.

"We'll be providing comprehensive integrated risk solutions," Mr. Keeling said.

It also will continue to write marine, aviation and satellite reinsurance. About 55% of the business will be property-related, and about 45% will be non-property business, he said.

The consolidation in the reinsurance industry also is reducing demand for retrocessional coverage, said James N. Stanard, chairman, president and CEO of Renaissance Reinsurance Ltd.

As the number of reinsurers declines, so, too, does the number of retrocessional programs, he said.

As the market has softened, the pricing of retrocessional reinsurance business has deteriorated to unattractive levels for retrocessional writers, said Mr. Hengesbaugh of LaSalle.

LaSalle wrote retrocessional business since its start-up in 1993, but now it writes few contracts, he said.

Renaissance Re itself has substantially increased the amount of retrocessional coverage it buys. In the first half of 1998 Renaissance's gross premiums increased 6.3% to $165 million from the year-earlier period, but net premiums declined by 14.9% to $117.6 million.

"The retrocessional market has stabilized, and now that we are a mature company, we are able to put together a retrocessional program more easily than we were four years ago," Mr. Stanard said.

Gross premiums increased in spite of the soft market, thanks to Renaissance's diversification over the past two years, he said.

In 1996, Renaissance Re set up Glencoe Insurance Ltd. as a surplus lines insurer for California property business; in 1997, it set up DeSoto Insurance Co. to write a portion of business from the Florida Joint Underwriting Authority; and earlier this year, it bought the U.S. operating units of Nobel Insurance Ltd.

"They are still relatively small operations compared to our catastrophe reinsurance operations, which are still our bread and butter business," Mr. Stanard said.

While Renaissance Re is looking to diversify further, it is unlikely to complete anything in the near future, he said.

LaSalle Re also has sought to diversify, and now about 30% of its business is marine, aviation, and satellite business, and high-level casualty reinsurance, said Mr. Hengesbaugh.

International Property Catastrophe Reinsurance Co. Ltd. also has diversified outside of catastrophe reinsurance, but to a lesser extent than most of its rivals. About 80% of IPC's business is catastrophe reinsurance, and the rest is a mix of property risk excess, marine and aviation.

"In the catastrophe business, people are more confident and much more comfortable with consistency. They want consistency in underwriting discipline and (ownership), and we've fulfilled that," said James P. Bryce, senior vp.

Despite the consolidation and the attempts to diversify, property catastrophe reinsurers are seeing some increases in demand for their core products.

There is some increased demand for coverage in California and Florida as rates have fallen, said Mr. Stanard of Renaissance Re.

"There are buyers coming into the market that previously did not buy," he said.

And while catastrophe reinsurers have not faced huge losses this year, they have seen an upturn in activity, observed Mr. Bryce of IPC Re.

Flooding in Britain, Eastern Europe, China and Korea; windstorms in the United States; and the ice storm that hit Canada and the northern United States, with most of its damage occurring in Canada, all have produced significant economic losses, but they still have not severely affected catastrophe reinsurers in Bermuda. The Insurance Information Institute estimated last week that Hurricane Bonnie (see story, page 1) caused $375 million in insured damage.

"There's been an increase in medium- to low-severity losses, which reinforces the need for the catastrophe product," Mr. Bryce said.

In the first half of 1998, IPC incurred losses of $14.5 million, compared with $5.2 million in the first half of 1997.

There have been some requests for backup coverage from regional insurers that have suffered losses on their original coverage and reinstatements, he said.

Reinstatements in the first half of 1998 helped increase gross revenues at IPC by 1.1% to $90.8 million compared with the first half of 1997, despite rate reductions of between 15% and 20%.

The main aim for the Bermuda cat reinsurers is to ensure they are still in existence to reap the rewards of higher rates when the market turns, said Alan Murray, senior analyst at Moody's Investors Service Inc. in New York.

"They want to make as much money as they can in the interim, but the main thing is to stick around," he said.

With that in mind, the cat reinsurers in Bermuda are underwriting selectively and managing their exposures with sophisticated models, Mr. Murray said.

In the future, the burgeoning securitization market will likely impact Bermuda. Several of the catastrophe reinsurers there are actively participating in the market. For example, X.L. Mid Ocean effectively bought retrocessional coverage through the capital markets within days of being established (BI, Aug. 17).

The increase in the number of securitization deals could have a detrimental affect on the Bermuda market in the future, suggested Mr. Murray of Moody's.

If the next hard market is started by a large catastrophe or series of catastrophes, the Bermuda market companies may not be able to write business at the

huge profit margins they were able to achieve when they set up in the wake of Hurricane Andrew in 1992 and 1993, he said.

Competition from risk securitization companies in Bermuda and elsewhere may curb the ability of cat reinsurers to hike rates, Mr. Murray said.