Major industry players gathered here from around the world totalk deals in the midst of a dynamic reinsurance market whoseoutlook is generally stable–although that could change in a hurrywith the downward pressure on prices, rating agencies herewarned.

Peter Grant, a director with Standard & Poor's in London,said that with a combined ratio of 90 and persistent discussion offalling premiums–often in the range of 5-to-10 percent–”you addthree-to-six percentage points for claims inflation and see howeasy it is for the industry to go from a banner year to adisappointing performance.”

Miles Trotter, assistant general manager of analytics with A.M.Best Europe, reported that while rates for U.S. catastrophebusiness remain firm, they are going up elsewhere. He said combinedratios for 2007 will be better without a major event.

“In that scenario, competition would heat up, while excesscapacity and downward pressure on all rates would be steeper,”resulting in weaker combined ratios in 2008, he added.

S&P's Mr. Grant described a market at a crossroads betweenpositive and negative directions, which he characterized as “the'New Dawn' versus the 'False Dawn.'”

“We believe the industry is at a critical juncture, and it'sgoing to go down one of two paths,” he told NationalUnderwriter.

One path–the “New Dawn scenario”–would be characterized by“cross-cycle earnings adequately underpinned by vastly improvedenterprise risk management and reinforced by more proactive capitalmanagement than has been seen in the past.”

He said the “False Dawn” scenario, on the other hand, would be“a continuation of what we've seen historically–which has beenextreme pricing cycles and the extreme earnings that have resultedfrom those,” as well as an unwillingness of management teams to“actually put into practice what we believe are the strong ERMframeworks that they've been building up for the past couple ofyears.”

Mr. Grant said S&P is “cautiously optimistic in the 'NewDawn' scenario,” adding that this view is a reflection of theindustry's “strong overall ERM credentials.” He said the enterpriserisk management tools are there, but “whether or not they'rewilling to deploy them when it really counts is where the questionis, which is why we're cautiously optimistic.”

He added that the rating agency believes there will be “lessvolatility than in the past, but we see there still will be some.”He noted that S&P believes the industry will fare better goingforward than it has historically.

Damien Magarelli, a director with S&P in New York, saidalthough the framework methodologies for ERM appear to be in place,what is untested among a number of reinsurers is their willingnessto actually deploy those methodologies in a softening market.

Declining price adequacy is an obvious negative, he said. “It'sa question of how far prices are allowed to climb before theindustry's discipline kicks in.”

The last point, he noted, is the potential increase in thefrequency and severity of natural catastrophes.

“I don't think it's so much whether or not we are in ahyperstate of natural catastrophe activity,” he said. “I think justthe mere uncertainty surrounding that question–if we are in aheightened phase, what the cause of that is, and the extent towhich that could be linked to global warming–that inherentuncertainty poses substantial challenges to the reinsurancesector.”

Mr. Magarelli said that although robust and improving ERMcredentials are “supported by the 'New Dawn' scenario, the factthat most or many of the ERM frameworks are unseasoned is anegative factor.”

He said that an area where there is tangible evidence of achange in behavior is “the increasingly proactive capitalmanagement we've seen.” Already in 2007, he said, there have been$20 billion of shared buyback programs announced.

While the programs may or may not come to fruition in the comingyears, “at least it is obviously a very strong signal of intent onbehalf of the executive teams of many of the influential reinsurerswithin the industry,” Mr. Magarelli noted.

He added that this is a “critical juncture for the industrybecause the strong ERM frameworks we believe have been built willstart to be tested–certainly into 2008, and likely into 2009.”

He said there were a number of aspects the rating agency wouldbe looking at as signals of limited willingness on behalf ofexecutive teams to actually put their ERM frameworks into action,including “a disconnect between medium-term business plans andcapital management initiatives, and a spike in new business as aproportion of the portfolio underwritten.”

Mr. Magarelli said that having excess capital can distortmanagement decision-making. In previous cycles, he said, “it wasalways perceived that more was more when it came to capital, whenin actual fact, I think we're all coming to the realization nowthat in certain circumstances, less is more where capital isconcerned.”

Best's Mr. Trotter said there recently had been discussion aboutloss of business for Lloyd's of London, “with companies succumbingto the enduring tax break” and the opportunity to write businesswith lower operating costs in Bermuda.

More recently, however, he said the situation has changed. The2005 start-ups were “underplanned in terms of volume of business,the markets as a whole were cutting exposures, and there also wereno major events in 2006.”

This led to a situation where underutilized capital surfaced inthe market, he said. While some companies have paid this back toshareholders, their other option is seek acquisitions, henoted.

“We have seen Bermudians coming to London, Validus picking upwith Talbot, and Ariel with Atrium,” he said, adding that overall,however, the two markets have been cooperating.

Mr. Trotter added that Lloyd's popularity is “at an all-timehigh,” for reasons including recent upgrades and the fact thatEquitas–its runoff facility for pre-1993 losses–was taken over byNational Indemnity, alleviating concerns.

Regarding securitization of risks, he said, there hasn't been a“great deal of take-up in London of deals of this nature.” Thereason, he noted, is “the units in London tend to be small and thecost involved for securitization rather high.”

Despite all of the concerns raised about pricing pressures, theglobal reinsurance outlook is stable for 2007, said Matthew C.Mosher, group vice president of global property-casualty ratingswith A.M. Best.

He noted that favorable earnings are anticipated, balance sheetsare in relatively good shape, and ERM is firmly on the agenda. Theimpact on private reinsurers of Florida legislation allowing thestate to take on more catastrophe risk, he said, is smaller thanoriginally anticipated, market softening is clearly underway, andcycle management is being tested.

For cycle management, he said companies must:

o Demonstrate their ability to operate profitably acrosscycles.

o Show a proven track record of management.

o Have an active underwriting focus of senior management that isapparent in management meetings and demonstrated through long-termprofitability.

Mark Nicholson, a director in Fitch Ratings' Insurance Group,said at a press conference here that there is no need for panic.While the reinsurance outlook is stable, however, “don't expect2006 results to be replicated,” he warned.

Mr. Nicholson noted that in 2007 there were more upgrades thandowngrades of reinsurers–15 downgrades to date in 2007, comparedwith 29 in 2003. Overall, the rating average is “A,” he said,adding that in 2003 there were no upgrades and there has been agradual increase in upgrades since.

Trends that could impact the market are increasingly difficultmarket conditions as pricing pressures increase, as well as theability for reinsurers to balance demands for return on capitalwith financial flexibility.

The industry's biggest near-term challenge is effectivelymanaging the underwriting cycle–”a skill that has proven elusive inthe past”–according to a new report issued by Fitch, “ReinsuranceReview and Outlook: Conditions and Trends Support Stable Ratings.”The report is available online at www.fitchresearch.com.