Reinsurance Pricing Rebound May Lack Anticipated Bounce

"Why did you have to spoil the party?" asked Marty Dolan, an investment banker from Morgan Stanley. Mr. Dolan and William Wilt, a Morgan Stanley analyst, questioned the impetus for what Mr. Wilt described as "sobering comments" included in a PartnerRe press release and reiterated by Mr. Thiele during a Webcast of the seminar.

Mr. Thiele, referring back to market commentary released with PartnerRe's third-quarter earnings report in late October, said, "I think I even used the word 'optimistic,'" when describing favorable market conditions at the time. He had then predicted 20-to-45 percent hikes in U.S. windstorm prices, double-digit catastrophe price increases elsewhere and substantial jumps in other lines.

"Something has changed," he said, noting that he was anticipating a better environment than the company is now seeing outside the United States. He said substantial price hikes are now confined to lines and markets directly impacted by the catastrophes of 2005, while competition is increasing in Asia, parts of Europe and in selected specialty lines.

While Chris O'Kane, CEO of Aspen Insurance Holdings, was wary of predicting the market's direction–likening it to predicting the outcome of a 60-minute football game 10 minutes after kickoff–he said the "early signs are a little disappointing on Europe and in U.S. regional business on the property side."

Noting that he would have predicted 10-to-20 percent increases on European property renewals for business that wasn't impacted by losses, he said such renewals now appear to be coming in no higher than the low end–10 percent.

In the United States, he said, renewals that have come up so far are "the easy ones"–those with diversified insurance books rather than predominately Eastern seaboard or other coastal risks. "Those have been put out with modest increases–10-to-15 percent," he said. "The early signs are not as good as I thought, but I don't know if they're a reliable guide as to how the game will play out."

Noting, on the other hand, that he previously expected casualty rates would fall, he said the drop has been arrested. He reported that Aspen had an increase in casualty reinsurance rate adequacy for the first time this year in October. "It was a 1 percent increase, so don't get too excited," he added–underscoring, however, that it contrasted with a minus-5-to-6 percent in the earlier months of the year.

Matt Mosher, a rating analyst and group vice president for A.M. Best, also expressed concerns about pricing during the seminar, noting that evolving changes in rating agency models might require some companies to hold more capital–and higher capital could, in turn, drive prices down.

Mr. Mosher began his remarks by describing recent changes in Best's analysis of natural disasters for rating purposes. He said the Oldwick, N.J.-based firm has been evaluating the ability of rated companies to withstand a 1-in-100-year hurricane or 1-in-250-year earthquake for almost a decade, introducing a stress test for a second event–a 1-in-50-year event–in 2001.

He added that recently, Best revised the second stressed event to a 1-in-100-year hurricane or earthquake, and introduced qualitative changes to loss figures–adding provisions for demand surge and storm surge, for example.

"There will be cases where additional capital will be required to support given rating levels, and the question we will have is how will companies deal with that additional capital? Will they view it as needed because of the risk that's there" as Best does? "Or will they look at that as this is extra capital they need to put to use? That's going to have a material impact on where the market goes and how the pricing of the market is driven."

He also suggested that while Hurricane Katrina has had a positive impact on pricing in the property and marine segments, the effects could be fleeting. Unlike the 9/11 attacks, which came at a time when the market had already begun to harden, Katrina hit when the market was softening.

"So, is it a changing event in the market," he asked, "or is it a speed bump" temporarily slowing down a trend of price declines?

Ken LeStrange, CEO of Endurance Specialty Holdings, responded that he believes Katrina was indeed a market-changing event. "The magnitude of the loss itself and the causes of it, coupled with the frequency experienced over the last two years, are meaningful changes that have to be compensated for in pricing," he asserted.

Still, like the others, he suggested there are limits to the ability to raise prices. While reinsurers used to think they could adjust prices forward to achieve payback for prior loss payouts, "I no longer believe that's possible," he said.

He pointed to the "advent of surrogates" for reinsurance–hedge funds participating in the industry, catastrophe bonds, and a new wave of interest in other vehicles–as limiting factors.

Substantial price hikes appear to be confined to lines and markets directly impacted by catastrophes, rather than rising across the board.