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Intense competition continues to keep reinsurance rates down, but unexpectedly low catastrophe losses boosted reinsurers' results for the first nine months of the year.

"It's very competitive both in the primary business and the reinsurance business," said Kaj Ahlmann, chairman, president and CEO of Overland Park, Kan.-based Employers Reinsurance Corp. "As far as the outlook is concerned, I don't see that changing in the near future."

"It's more of the same, really," agreed Bard E. Bunaes, chairman and CEO of Constitution Reinsurance Corp. in New York. Prices are continuing to drop, "and the emphasis seems to be on top-line growth among everybody."

"Hard markets are the exception; soft markets are the rule," said Dennis Zettervall, chief executive officer of Hartford Re Co. in Hartford, Conn. "What we have today is the rule, and it'll probably be with us for some time tocome, so we might as well get used to it.

"There's a saying that the best armies are the battle-hardened armies, so I look at it this way: The market presents an opportunity for reinsurers to either get better and stronger at what they do and thereby prosper, or gives them an opportunity to get worse and eventually fail, so each reinsurer will have to chart its own course through the turbulence."

The 43 U.S. reinsurers surveyed by the Reinsurance Assn. of America reported a 101.3% combined ratio for the first nine months of the year, compared with a 103.1% combined ratio for the comparable period a year ago (BI, Dec. 1). This is a slight improvement over the 101.5% combined ratio reported for the first half (BI, Sept. 8).

The 20 largest U.S. reinsurers based on net premiums written also reported a 101.3% combined ratio for the first nine months, compared with 103.6% for the comparable period a year ago.

The Top 20 includes the results of the Berkshire Hathaway Group, which does not participate in the RAA survey, and Gerling Global Reinsurance Corp. of America, formed in January (BI, Jan. 27). In addition, results for American Re Corp. now include those of Munich American Reinsurance Co., with which it has merged.

"I think you should ask two questions," said John Berger, president and CEO of F&G Re Inc., a Morristown, N.J.-based unit of USF&G Corp. One is whether the 101.3% combined ratio should not be even better, given this year's low catastrophes. If this were a normal catastrophe year, "how much worse would these results be?" he asked.

The other question, he said, is whether people are managing results, such as underreserving, to get a better return on equity. "I just can't believe that given the price levels, the industry's at a 101.3," said Mr. Berger.

Declining premium growth reflects the soft market as well as higher retentions by primary insurers, observers say. The reinsurers in the RAA survey reported $15.07 billion in net premiums written for the first nine months of 1997, up 6.7% from from the comparable period a year ago. This is a decline from the 8% growth reported for the first half.

Excluding Gerling Global, the top 19 reinsurers reported $13.85 billion in net premiums written, a 7.3% increase. Although the larger reinsurers continue to attract a greater share of the total business, this is still a decline in growth from the 8.6% increase reported by the top reinsurers for the first half.

"It looks pretty gloomy right now, and I, unfortunately, don't see any changes," said Adrienne W. Reid, senior vp and chief treaty underwriting officer for Zurich Reinsurance (N.A.) Inc. in New York.

Said Richard E. Cole, chairman of the Stamford, Conn.-based Chartwell Reinsurance Co.: "We don't see any signs of anything positive happening in our business. There's still too much capital going after the same business."

The driving factors in this market are low catastrophe losses, the intense price competition and higher retentions, said Alan Murray, vp at rating agency Moody's Investors Service Inc. in New York.

What is remarkable about the results is that despite the absence of catastrophes, reinsurers' results were very consistent between this year and last, in contrast to the primary industry, "where we have seen a sharp improvement this year vs. last year because of the absence of catastrophes," said Mike Smith, an analyst formerly with Salomon Bros.

"This simply speaks to the dramatic changes we've seen in the reinsurance market" with its current emphasis on excess-of-loss business, as opposed to the proportional business predominant in the market 15 years ago, said Mr. Smith.

The intense price competition is going to continue next year, though it is likely to be accompanied by more catastrophes, observers say.

"The interesting thing is what will happen if we have a more normal catastrophe-event year" in light of the pricing declines, said Don Watson, director at Standard & Poor's Corp. in New York.

Given there does not seem to be any exodus of capital from the sector, continued price competition and compressed margins with possibly greater catastrophes will make earnings growth "incrementally more difficult to attain," said Ken Zuckerberg, vp at Moody's.

"I think 1998 is going to be an extremely tough year for the reinsurance business," said Peter Wade, an analyst with Lehman Bros. in New York.

"I think in the aggregate, most of their customers will likely buy less reinsurance, so there's going to be pressure on both unit and price growth, which is going to hurt them. And as most reinsurers scramble to hold onto some kind of market share or increase their market share, that pressure on growth is going to transfer to pressure on margins," he said.

But Jim Miller, president of Kemper Reinsurance Cos. in Long Grove, Ill., said, "It just seems kind of clear to us that one of the things that's happening is that some of the companies are starting to differentiate themselves from everybody else, by one method or another.

"It could be some value-added services, or something else. Whatever it is, it looks like even in this market, good companies are finding ways to grow, and we think we're in that category," Mr. Miller said.

Said F&G Re's Mr. Berger: "I just see increased competition, increased mergers, increased acquisitions. What we're experiencing now is just going to continue."

Pressure on cash flow will continue into 1998, predicted John Adimari, vp at Greenwich, Conn.-based NAC Re Corp.

"I think we'll start seeing the top line showing a reduction in reinsurance premiums," said Chartwell Re's Mr. Cole. "I think more and more reinsurers are saying they're not going to write business at these rates."

But more reinsurers continue to be formed, which makes "no sense," he said. "That's just delaying a turn in the market."

While poor management and underwriting are the two biggest internal threats to the reinsurance industry, the biggest external threat is the risk of inflation, said Hartford Re's Mr. Zettervall.

"It's a big risk, because reinsurers are promising today to pay claims five, 10, even 30 years into the future, and many reinsurers are pricing their product anticipating modest inflation will last forever" said Mr. Zettervall.

"From that perspective, the single most important person in the world to our business is (Federal Reserve Chairman) Alan Greenspan, because were inflation to become a problem as it was in the 1970s, then I think many reinsurance companies could topple, and the reputation of a generation of management would be destroyed," Mr. Zettervall said.

"Let's hope it doesn't happen. Everybody should send a Christmas card to Alan and wish him long life and may his policies live forever."