Skies are basically bright in the relatively stable world of reinsurance as major players gather to strike deals in Monte Carlo during the industry's annual rendezvous. But carriers are still cautiously waiting out the hurricane season, and a few threatening clouds are gathering–generated by the law of supply and demand–rating organizations, brokers and carriers have observed.

“There are a couple of concerns over the horizon,” said Peter Dickey, managing senior financial analyst with A.M. Best. “Although 2006 was an excellent year, with the advent of new startups and the continued flattening of rates in both property and casualty lines, capital management is one of our concerns–what companies are doing with the additional capitalization they have managed to accrue through 2006.”

Another concern, he added, is new capacity entering the market “through hedge funds and the capital markets and the effect they will have on pricing and capacity.”

The big issue for reinsurers is what they will do with their capital–whether they will try to gain market share, or pull back and manage the cycle, agreed Matthew Mosher, group vice president at Best. “We're seeing new approaches to the catastrophe bonds to try to further cut the costs of utilizing the catastrophe bond market,” he said. “All those things are going to continue to put pressure on reinsurers.”

John Laubach, senior financial analyst at the rating agency, noted that A.M. Best's outlook for the reinsurance sector is stable, up from negative.

“There had been some actions subsequent to [Hurricanes] Katrina/Rita/Wilma, but we think with the very healthy results in 2006 and 2007, at least until now, we see a stable outlook for the industry,” in terms of both financial strength and profitability, he said.

However, Mr. Mosher noted that a source of concern “that can't be overlooked” arises from the success of primary insurers over the last few years. Having built up solid capital bases, those insurers that feel they are paying too much for reinsurance are increasing their retentions.

This means that in addition to an increased supply of capital, there is also lower demand. “So there are certainly going to be pressures on terms and conditions as well as pricing,” he said.

Because of the market's global nature, he said general pricing pressures are across the board. “More global reinsurers have the ability to diversify, and perhaps there are pockets that aren't softening as quickly,” he added. “But for the most part, it is a global business and you see movement on a global basis.”

A noteworthy event this year, the analysts agreed, was the recent affirmation of the financial strength rating of French reinsurer SCOR–which A.M. Best had placed under review with negative implications when the Paris-based company announced its intent to acquire Swiss Converium.

In August, when SCOR acquired Converium, A.M. Best upgraded Converium's financial strength rating from “B-double-plus” to “A-minus” and affirmed SCOR at “A-minus” also–a rating level that SCOR has held since August 2006.

A.M. Best and other major rating agencies downgraded SCOR in 2003, and Converium was downgraded three years ago, immediately preceding the Monte Carlo Rendez-Vous de Septembre in 2004.

“Not only has SCOR done a good job in turning around the strength in its balance sheet and the level of profitability,” according to Mr. Moser, it also has been successful in “diversifying and absorbing Revios [acquired in November 2006] and Converium and diversifying their business segment as well.”

He said SCOR has successfully focused on “profitability, balance-sheet strength and sustaining itself in the marketplace, as opposed to a focus on market share alone with limited focus on profitability.”

Mr. Moser also noted SCOR's ability to raise capital at a time when the cloud of the downgrades was still hanging overhead. “A lot of reinsurers would struggle to be able to raise the amount of capital they raised at the time the downgrades were current,” he said.

Hannover Re's chief executive officer, Wilhelm Zeller–who breaks down the world reinsurance market into three parts (the United States and Bermuda, London, and the rest of the world)–said he is largely undaunted by market conditions he's observed so far this year.

The Bermuda market, he said, is “encouraging,” appearing responsible and disciplined, and market participants are “not doing anything foolish with their excess capital, which builds up with the phenomenally good results we experienced last year and this year.”

Of the London market, he said, “I see equally encouraging signs [with] the franchised directorate curbing the capacity. Also, I'm seeing what the major syndicates are doing–driving their capacity down in line with the quality of the market. So that all makes a lot of sense.”

He called attention to one worrisome note–citing a small number of European reinsurers whose actions could soften the market, with some looking to regain lost ground and others wanting to grow their bottom lines.

Mr. Zeller said his company's practice in a softening market is to reduce volume as well as market share, because of an “infamous interplay between proportional and nonproportional business.”

“Broadly speaking, you can write proportional business only in hard markets. This is why we always grow strongly in a hard or hardening market. Once prices are softening, we come off the pro-rata treaties, and this is why our volume declines disproportionately,” he explained.

Hannover Re's U.S. portfolio declined 7 percent as of the recent July 1 renewal, and Mr. Zeller said four percentage points of this were the result of increased retentions by cedents.

“The balance was due to our own reductions as a reaction to the pricing developments,” he said. “However, the rate level of the renewed portfolio is more or less unchanged. That is cycle management at its best.”

Brian Boornazian, head of reinsurance for Aspen Insurance Holdings Ltd. and president of Aspen Re America, said the good news is that from an absolute rate level perspective, for the most part, the reinsurance market remains attractive.

He added, however, that “where we see things trending for the future is generally a downward movement in rate levels.”

“This is unfortunate, given we're not that far away from other past losses that have dramatically impacted our industry,” he added.

He said that during this type of market, companies can make strides in differentiating themselves. “The companies that within their skill sets have the specialty underwriting expertise to pick and choose the best business within the various sectors–rather than make just a total-sector play–are going to outperform those that don't have this capacity and are more at the whim of the market.”

However, he cautioned that “you can never be too careful in our industry. While everyone currently is talking about hurricanes, there are earthquakes, unforeseen liability exposures and numerous other risks that require successful underwriters to be ever vigilant.”

Bryon Ehrhart, president and CEO at Aon Re Services, said that assuming there are no major events this year, “the losses we've seen are between 10- and 20 percent off–a little less for some of the complex commercial with the standard commercial lines in between.”

He predicted that, in addition to price, “we will see softening of terms and conditions around the world as well.”

Mr. Ehrhart said that while significant technical advances have been made in pricing reinsurance, “this is still a market that has its discipline driven by losses. Until we have another large loss, we won't see the continuation of the discipline that's been in existence for the last two years.”

He added that “there are still reinsurers that want to grow their businesses in the softening marketplace.”

Greg Richardson, chief underwriting officer of Harbor Point, said while none of the dozen or so events occurring worldwide so far this year have been market-changing, “they serve as a good reminder that the international covers can generate material losses.”

He added that “a lot of the covers are at pretty low rates on line,” or ratios of premium to limit, and as a result, “even small U.K. losses that barely get into the reinsurance programs may be enough to wipe out all the reinsurance premium in the United Kingdom.”

Patrick Thiele, president and CEO of Partner Re in Bermuda, noted that since Jan. 1 and through the April 1 and July 1 renewals, a few trends have continued.

One such trend, he said, is that clients are retaining more business, moving their attachment points up and dropping the lower layers of their programs.

This is the result of strong financial conditions and good results worldwide, giving them capability to handle “lower level cat and reinsurance programs,” he said.

The net effect of the greater retentions and marginally lower prices, he noted, is that non-life reinsurance premium volume “is probably shrinking at a rate of 3 percent to 4 percent a year.”

He added that while there are concerns about competition's effect on pricing, “this is a normal cyclical occurrence. If you have decreased demand and increased supply, competition will increase for the remaining business and inevitably prices will move down.”

Paul L. Karon, CEO of Benfield Inc., based in Minneapolis, offered a U.S. perspective. “Our clients are looking for lower prices and broader coverage. It's the classic softening market dance,” he said.

He also noted the industry is taking higher retentions. “I'm seeing some of that in our book, but I'm hearing more about it in others. We have a larger share of property, and I think that's been holding, but I think the liability lines have been moving up retentions. It's certainly a trend.”

While increased retentions could contribute to additional softening, “the big variable is the obvious one–it's just the weather in the next two months,” he said.

As for renewals, “assuming there are not big hurricanes that cause a lot of damage, I think property rates will go down–probably another 10 percent,” he concluded.

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Special Reports /

Will Increased Supply, Lower Demand Threaten Global Re Market's Stability?

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