Bermuda insurers are continuing to pursue strategies todiversify their operations by acquiring or launching facilitiesoffshore, but while most will travel the distance to London or theUnited States to do so, they won't bolt for new businesses at anyprice, executives on the island say.

Robert Deutsch, chief executive officer of Ironshore, founded inearly 2007 as a commercial property insurer, admits that hiscompany's first steps to expand--which involved the launch of twoliability operations in the United States late last year--did notcome about quite the way he envisioned. "We originally thought wewould be in London before the United States, and that has nothappened," he said.

The company had been in talks to acquire Heritage UnderwritingAgency PLC--a Lloyd's agency focused on underwriting worldwideproperty and non-U.S. liability risks--but those broke down earlythis year over price considerations, he confirmed. But the questfor a London platform continues.

"We're looking at properties that are for sale and we'll alsoconsider starting from scratch--building our own syndicateoperation. We're pursuing parallel tracks," he said, adding that"whichever one comes about first that makes the most sense" is thepath the company will take.

Are sellers unrealistic in their price expectations?

"I'm not sure they're unreasonable," Mr. Deutsch said, notingthat Heritage and others are certainly aware of prices paid toLloyd's operations last year--referring, for example, to theacquisition of Kiln Ltd. by Tokio Marine & Nichido FireInsurance. "Maybe they thought their business was as valuable asthose companies," he added.

The deal for Kiln--which had re-domiciled to Bermuda in mid-2007and wrote four-times as much premium as Heritage in 2006--came witha ?442 million price tag (nearly $900 million), according to aDecember 2007 announcement.

"I think Heritage is a good company, or else we wouldn't havegone after it," Mr. Deutsch said. "But at some point, we need toexert price discipline, and we just couldn't see eye to eye on theprice."

For Don Kramer, chairman of Ariel Re--which bagged AtriumUnderwriters in a deal valued at ?193 million (over $380million)--it was expanding to the United States that proved to bedifficult.

"I had looked at business opportunities in the United States,and candidly, some of the expectations of companies for sale wereoff the charts," he said. "They weren't realistic about theoncoming environment, where prices are coming down and competitionis becoming severe."

Instead of paying a huge premium-to-book value "for something Ifelt was in a period of decline, I'd rather start from scratch andbuild it myself with great care," he said, explaining Ariel'sOctober 2007 purchase of a shell company, Valiant Insurance, fromZurich North America.

The process will be slower, but even in a soft market, "I havegood technicians capable of finding sweet spots," he said. "I'drather do that than buy somebody and [see] their earnings decline ayear after I bought them at some staggering price."

With licenses in 48 states and six people already on board,Valiant is targeting specialty insurance lines such as professionalliability, setting it apart from what is primarily aproperty-catastrophe reinsurance book with a sprinkling of marineand property insurance for Ariel in Bermuda.

"The longer-tailed business has lower [underwriting] margins butearns more from accumulated assets. Valiant will take time beforeit builds earning power," Mr. Kramer said, adding that earningsover time should be more stable than earnings on cat business.

Mr. Kramer declined to disclose Ariel's earnings for 2007,noting that the company is in the process of preparing an S-1 (afiling used by public companies to register their securities withthe U.S. Securities and Exchange Commission). "I don't know if I'lluse it," he said of the filing.

"We wrote a decent amount of volume," but probably the least ofthe Class of 2005 Bermuda companies that started up in the wake of2005's hurricanes, he said, speculating that Ariel's combined ratiowas the lowest of the group. "The amount of money you make whennothing happens in staggering," he added.

"If you asked me six months ago, I'd tell you we were nothingmore than opportunistic capital catching a dislocation in themarket, but the dislocation seems to be over," Mr. Kramer said."From Day One, I never wanted to be a property-cat-only company. Ifyou want to build sustaining value, you have to builddiversification in."

Like Mr. Kramer, David Cash, chief underwriting officer ofEndurance Specialty Holdings, described his company's opportunisticroots and evolution since its early days in 2002. Initially, "weentered the markets we felt were most disrupted [and] easiest toget into" after the Sept. 11, 2001 World Trade Center attacks, Mr.Cash said.

"They were the markets where you have large-scale risksyndication," such as catastrophe reinsurance, where clients needhundreds of millions of dollars in capacity.

"They can't buy it all from one company," he explained, so withrisks syndicated across the market, "it's pretty easy to enter.That's the good news." The bad news is a lot of competitors enter,too, he added.

"It's the right way to build a company quickly," Mr. Cash said.Since then, Endurance has worked to enter markets that are harderto get into--"where there's not as much syndication, wheredistribution is more private," he said, giving the example ofsmaller-limits U.S. business placed through independent agents.

"We've been trying to grow our footprint in that space" inseveral ways, Mr. Cash said, highlighting a California workers'compensation venture dating back to mid-2006 and the acquisition ofan agricultural underwriting company last year.

The workers' comp initiative, netting roughly $200 million inpremiums, involves a strategic partner that handles the policyissuance. The third-quarter 2007 acquisition of a managing generalagency known as ARMTech represents some $400-to-$450 million ingross crop insurance premiums, Mr. Cash said, noting thatindividual "small-ticket" policies are placed with ruralindependent agents.

Endurance CEO Kenneth LeStrange said during a third-quarter 2007earnings conference that the ARMTech deal would likely bring thecompany's split of insurance and reinsurance business close to a50-50. Through nine months, 34 percent of $1.5 billion in totalgross premiums was in insurance, compared to 24 percent in 2006,according to financial reports.

"We're trying to move ourselves closer to the fragmenteddistribution channel [for] local domestic U.S. insurance," said Mr.Cash, adding that the business "tends to be stickier," pushing upoverall renewal ratios.

"The [profit] margins are probably lower than what we have seenon some of the truly high-octane syndicated risks in Bermuda, butthey're more stable and will likely persist through the softmarket," he added.

Commenting more broadly on business strategies that may emergefor Bermuda market competitors, Mr. Cash observed that they won'tall pursue build-or-buy strategies.

"A lot of the Bermuda companies are wrestling with this issue,"he said. "You set up a company [and] manage business with a smallstaff. You can write quite a bit, but when the market softens, youmay find yourself marginalized."

At that point, he added, "you either manage expenses and staysmall [or] you say, 'There are too many people coming in. We nowneed to build out an onshore operation'" that doesn't deal as muchwith syndicated risk.

There are definitely Bermuda companies that have used the firststrategy, he said, citing IPC Re and RenaissanceRe, which havehistorically focused on property-catastrophe reinsurance.

"The [current] market issues are challenging, [and they do]create, for the next year or two, a moment of truth for manyreinsurers as respects their business models," he said. "This yearfor us is one of executing on the insurance side."

For Scott Carmilani, chairman and CEO of Allied World AssuranceCorp., where the mix of business has always been tilted towardinsurance, the market moment suggests a different path. AlthoughMr. Carmilani said the overall mix--nearly 60 percent insurance/40percent reinsurance--won't change in 2008, Allied World will writemore reinsurance in the United States.

"There has been some softening in the U.S. casualty market, andit's easier to manage the business--you can get closer to thecedents from the United States," he said--noting, for example, thatmore in-depth management through audits is possible onshore.

"Being offshore, you are almost a step removed" from U.S.insurers, he said, noting that tax and regulatory issues "preventyou from having deeper dives on their territory and from havingclose working relationships with them."

To grow the U.S. reinsurance book, Allied World bought a fullylicensed company, Converium Insurance (North America), in a dealthat he said would close by the end of January. The new carrier,which is to be renamed Allied World Reinsurance Company, islicensed for insurance as well, "but it will predominately be usedto start our U.S. reinsurance capabilities," Mr. Carmilanisaid--noting that up to now, all reinsurance had been written fromBermuda.

The U.S. reinsurance book will be focused on casualty, whileproperty-catastrophe will continue to be managed from Bermuda. Astable, client-focused property-cat market exists in Bermuda, and"there's no need to shift any of that," according to Mr.Carmilani.

While the distribution of insurance and reinsurance business isnot likely to change this year, "there will be some organic growthto the business because we will be marketing and working on areasthat we haven't concentrated on before."

"Our strategy is really to diversify geographically and byproduct," positioning the company to better handle market cyclesand creating a better spread of risk, he said.

Asked if there were any particular areas he will seek to moveinto, Mr. Carmilani said "there are a number. It's too early toannounce what we're doing, but we're going to be adding somecapabilities."

One recent area of product expansion for Allied World'sinsurance book--which historically has had an excess casualty andprofessional liability focus--was in the specialty program businessarea, partially fueled by a program manager agreement with C.V.Starr announced last May.

"We continue to look for opportunities in the specialty area--toorganically grow where we can and [to] look for acquisitions," saidMr. Carmilani, noting that Allied World hopes to at least doublethe number of programs--less than a dozen--in the near term.

Current programs on the books include a casualty constructionprogram, a municipalities program, a professional liabilityprogram, and a Long Island, N.Y., construction property program, henoted.

Outside the United States, Mr. Carmilani revealed that AlliedWorld--which currently has operations in Dublin and London,including a Lloyd's box--plans to start operations in Hong Kongthis year, and to add capabilities in Europe, possiblySwitzerland.

While Endurance has beefed up its European and Asian capabilitywith some recent executive hires, back in the United States, thegoal of getting closer to local distribution partners has beenpartly accomplished by adding specialty insurance underwritingteams in cities including Atlanta, Boston, Los Angeles andSeattle.

Asked how Endurance distinguishes itself to attract U.S. teams,Mr. Cash pointed to long-standing relationships with the Endurancemanagement team, going on to describe what he sees as a separationamong Bermuda insurers--between those with management teams havingU.S. experience and those with London experience.

The latter "are very skilled at navigating through Lloyd's,which is a legitimate way to access U.S. business," he said.

"People will tell you it's almost a matter of preference, [and]for us the more natural approach is to build onshore in the UnitedStates," he said. "But if you don't have those relationships, youmight be better off trying to do it from London."

"There are numerous good reasons to be in London at this point,"said Ironshore's Mr. Deutsch. "A lot of the London business isactually [comprised of] U.S. insureds, but it might be businessthat we don't see in Bermuda or the United States."

Reasons for this may be historical, he added. "It could bebecause of a relationship that a London broker has with theaccount. It could be a type of binding authority that is prevalentin London, or it could be a specialty class of business where theexpertise is in London for underwriting it," said Mr. Deutsch.

Although developing a Lloyd's platform is a high priority,Ironshore was able to attract onshore talent to start up two U.S.specialty units--including American International Group veteransGreg Flood and Mike Mitrovic to head up IronPro (a New York-basedmanagement and professional liability facility), and Joe George, alarge-account casualty expert who leads IronBuilt (a Boston-basedspecialty construction unit).

"We always expected to diversify our portfolio because that'struly how you build value for shareholders," said Mr. Deutsch, whois the former chief financial officer of CNA and one of thefounders of Executive Risk. He also sits on the boards of directorsof Platinum Underwriters in Bermuda and Chaucer Holdings PLC atLloyd's.

"We don't think we would have a long track record of success ifwe just focused on one line," he said. He did note, however, thatthe need for property-catastrophe insurance still exists in theUnited States, albeit to a lesser extent than when Ironshorelaunched to respond to a capacity crisis in coastal states.

In terms of geographic spread, Ironshore has written in all 50states, and 25 percent of the business is outside the UnitedStates, he said--listing Australia, Bengladesh, Mexico and Russiaas areas where risks have been written. "We have major business inthe Caribbean, the Bahamas, Jamaica and the U.S. Virgin Islands,"he added.

Having written $330 million in premiums in 2007--$315 million ofproperty business from Bermuda and $15 million of liability fromNew York--Mr. Deutsch said that in 2008 the liability book couldgrow to $60 million, given that IronPro only opened its doors inSeptember.

To further develop the U.S. platform, Ironshore acquired twoshells--grabbing one (authorized to write E&S business in 40states) from TIG Insurance Company in January, and the other (anadmitted carrier from Folksamerica) late last year.

At Ariel, the acquisition of Zurich's shell--Valiant--wasovershadowed by the summer announcement that it would acquireAtrium at Lloyd's.

According to the offering document, Atrium and Ariel eachreported gross premiums of $300 million in 2006. But while 85percent of Ariel's was in short-tailed reinsurance business,product lines for Atrium's Syndicates 570 and 609 include aviation,marine and energy insurance, MGA-sourced U.S. casualty business,and U.S. professional liability, in addition to worldwidereinsurance.

With Atrium writing "a significant amount of U.S. surplus linesbusiness," Mr. Kramer said "the combination may have some slightsymbiosis," pointing to the long relationships that the Lloyd'sunderwriters have with U.S. E&S brokers, and the fact that somebusiness may move back to the admitted market, where Valiant canoffer admitted paper as conditions soften.

"The constraint is that we still lack a rating that reflects ourcapital strength," he said, pointing to the fact that Ariel andValiant are still rated "A-minus"--the highest level given torecent start-ups.

For Atrium, on the other hand, "I get Lloyd's 'A-plus' rating,"he said, pointing to that derivative rating as a major acquisitionbenefit and a big draw to Lloyd's for other nontraditional Bermudainsurers.

With lower start-up ratings, such insurers, he said, are forcedto be more conservative in their risk-taking than they mightotherwise be because of the constraints of capital adequacy ratiosassociated with those ratings.

"The object of this game is to generate a high return-on-equity,and that's associated with how much risk you take, he said. "I'd bewilling to take a little more risk to generate a little higher ROE,but the rating agencies won't let me."

At Lloyd's, he added, "I can get that kind of leverage becauseit is so well-established [and] because they have a securityfund."

Nontraditional companies looking to expand from their Bermudaroots also gain access to 39 U.S. states and all of Asia and Europethrough Lloyd's, he added.

In addition, he said, prior concerns about Lloyd's were put torest when Berkshire Hathaway agreed to reinsure all of theliabilities of Equitas--the market's runoff facility for oldliabilities--in late 2006. "The legacy risk of some shock-loss fromhistoric events is pretty much out of the market," he noted.

Putting all those things together, he said, "London is goingthrough a flowering period," noting that even Goldman Sachs set upa syndicate (Arrow Syndicate 1910) last year. "People are comingwith fresh capital and reasonably new ideas of things that willmake Lloyd's more valuable."

Mark Spurlock, a consultant for Smart Business Advisory andConsulting in London, said that not only is London becomingattractive to Bermudians, but more and more London operations arefinding their way to Bermuda. He pointed to the fact that Hiscox,Omega and Kiln have all re-domiciled since 2006, following the leadof Catlin some years earlier.

"Initially, it was very much, 'let's test the waters'" and seeif this can be done, he said. Now, many are seeing that it has beendone and that regulatory burdens were not too onerous, he noted,adding that Bermuda's flowering--from a center of narrowly focusedbusinesses emphasizing reinsurance to one of broadly diversifiedplatforms--is further driving the moves.

Technology, he suggested, is another force driving Londoners andBermudians together, he said. "You have less of a need forface-to-face negotiations and the physical stamps to come down," hesaid, adding that being able "to do things electronically insteadobviously helps Bermuda."

"More and more, Bermuda and London are becoming one market. Ithink it can be too attractive to look at this as aLondon-vs.-Bermuda thing," he said, noting that moves occur in bothdirections, with neither trend obviously predominant.

"It's a global market and increasingly insurers are everywhere.So when you have Hiscox being domiciled in Bermuda, but at the sametime, they're one of the largest syndicates in Lloyd's, what arethey? Are they a London-based underwriter? Are they a Bermuda-basedunderwriter?" he asked.

"The fact is, they're both," he said, noting that thedistinction is only really important to regulators and taxauthorities, adding that Bermuda's lighter touch on regulation andlower tax rates continues to attract insurers.