ACE to expand cat book
Bid for CAT Ltd. would give ACE greater U.S. presence
HAMILTON, Bermuda – ACE Ltd. would significantly expand its property catastrophe reinsurance business into new areas with its announced purchase of CAT Ltd. for $711 million.
The deal will bring enhanced technological systems to ACE and a book of business that will complement rather than duplicate its existing property catastrophe unit, Tempest Reinsurance Co. Ltd., said Brian Duperreault, chairman, president and chief executive officer of ACE.
“Tempest Re has established its underwriting expertise in the more-traditional property eat product lines. CAT is an acknowledged leader in the application of proprietary modeling techniques to the non-traditional lines of business,” Mr. Duperreault said in a statement.
Also, regional accounts in the United States make up a large proportion of CAT Ltd.’s business, whereas Tempest concentrates on national accounts and international business, observers say.
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ACE’s purchase of CAT Ltd. combined with EXEL Ltd.’s purchase of Mid Ocean Reinsurance Co. Ltd. earlier this month could stem the rate decreases for property catastrophe reinsurance, but the consolidation trend will have to continue for rates to increase, said Willis T. King Jr., vice chairman of Guy Carpenter & Co. in New York.
“The two deals will lead to some reduction in capacity, and when you combine that with the fact that rates on line for property catastrophe business are so low that it’s not very attractive business, then maybe there won’t be big price reductions at the end of the year,” he said.
From a financial point of view, the deal is another indication that some insurance and reinsurance executives have a higher estimate of the catastrophe reinsurance industry than do most Wall Street investors, said Michael Smith, an analyst at Bear Stearns & Co. Inc. in New York.
Catastrophe reinsurance stocks are today viewed little differently from property reinsurance stocks in 1988, in terms of value, by the stock market, he said.
“Much has changed since 1988 that should justify higher valuations in the marketplace, and it is the astute players that are taking advantage of that,” Mr. Smith said.
In particular, catastrophe reinsurers are attaching at much higher layers in reinsurance programs than they were 10 years ago, and the coverage is viewed more as a protection of capital rather than earnings, he said.
“The business is still volatile, but not anywhere near as volatile as it used to be,” Mr. Smith said.
The deal also is a further indication of ACE’s aggressive growth strategy, and the company will likely continue to make acquisitions, said Alan Levin, a managing director at Standard & Poor’s Corp. in New York.
Consequently, S&P has changed its counterparty rating outlook of ACE to negative from stable, he said.
“It’s not that we don’t like the strategy, but it’s a simple fact of life that there is a certain amount of risk involved,” Mr. Levin said.
The deal supersedes a previously announced initial public offering by CAT Ltd. (BI, Jan. 26).
ACE will finance the deal through a public offering of 16.5 million of its shares, which it expects will raise between $550 million and $600 million.
The number of shares offered approximately corresponds with the number of shares ACE has repurchased since its acquisition of Tempest in 1996.
As part of the deal, the 60% holding CAT Ltd. has in Enterprise Reinsurance Holdings will be distributed to CAT Ltd.’s current shareholders prior to the acquisition by ACE. Enterprise Re was founded last year with $100 million in capital to offer finite risk and alternative risk transfer insurance and reinsurance products.
If the deal is completed in April, as expected, CAT Ltd. will be merged with Tempest. In 1997, CAT Ltd. had net premiums of $136 million and Tempest had net premiums of $115.3 million.
Donald Kramer will continue to head Tempest.
Of the eight property catastrophe reinsurers that set up in Bermuda in 1992 and 1993 to take advantage of the soaring rates that came after Hurricane Andrew, CAT Ltd. is the last privately held company. The others have gone public or have been taken over by public companies.
The company set itself apart from most of the Bermuda-based reinsurers by concentrating on customized coverages, including multiyear contracts, variable attachment points, aggregate coverage, profit-sharing agreements and securitization deals.
Paul Hasse, chief executive officer of CAT Ltd., and Charles Kline, its president, will become co-chief executives of ACE Capital Products, a new company that will concentrate on financial products, including securitization and asset management.
ACE attempted to enter the insurance securitization market in 1996 through the launch of a $25 million to $30 million catastrophe-linked bond offering, but the issue failed (BI, April 14, 1997).
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