The U.S. reinsurance industry is relatively unscathed by the catastrophes that hit primary insurers in the first half, but reinsurers still are exposed to soft prices and the prospect of declining earnings.

Reinsurers were largely insulated from the heavy catastrophe toll in the second quarter because much of their business is written on an excess-of-loss basis.

"The reinsurance industry has moved up in terms of its attachment points for property risk, so it takes a pretty good-sized event, certainly more than a $300 or $400 million hurricane, to really hit" the reinsurers, said Weston M. Hicks, an analyst with Sanford Bernstein & Co. in New York.

Rather than one major event, the second quarter had 16 relatively small catastrophes that combined generated a total of $3.4 billion in losses.

"You can see very little visible impact from catastrophes," said Michael Smith, an analyst with Bear, Stearns & Co. in New York. "The reinsurance market has quite successfully insulated itself from the high-frequency, low-severity event."

"I think we've seen it since '92," William J. Adamson, chief executive officer of CNA Re, a unit of CNA Financial Corp. in Chicago, said of that situation. Despite the soft market, he added, "Reinsurers have generally distanced themselves from cat losses below a certain threshold, so smaller losses just aren't going to affect the reinsurers to the same degree it did prior to Hurricane Andrew."

The soft market, however, still is reflected in reinsurer's first-half results.

The 40 reinsurers that participate in the Reinsurance Assn. of America's six-month survey posted $9.91 billion in premiums written, up just 1.1% over the first-half of 1997.

The top 20 reinsurers based on net premiums written, however, reported $9.23 billion in net premiums, a 1.9% decline from 1997. Business Insurance includes in the top 20 the results of the Berkshire Hathaway Group, which does not report its results to the RAA.

The RAA reinsurers reported a 101.3% combined ratio for the first six months of the year, compared with 101.5% for the comparable period in 1997. The top 20 reinsurers reported a 101.2% combined ratio, compared with 101.5% for the 1997 period.

"These aren't terrific results, but there's nothing there that represents a significant change from what we've been seeing recently, and there's nothing here that's especially distressful," said Mr. Smith.

"I guess the combined is still trending positively because of modest reinsurance losses from catastrophes and continued favorable trends in liability lines," said Alan Murray, senior vp at rating agency Moody's Investors Service Inc. in New York. Even so, he added, reinsurance prices at best are stable and at worst are deteriorating.

The combined ratio "still seems awfully low considering the pricing in the marketplace, and I think the prospects in that regard aren't particularly bright, because it would appear they aren't pricing their business within an acceptable risk/return range," said CNA Re's Mr. Adamson.

"I think we are headed for some pretty dire consequences," particularly in light of the Year 2000 issue and the continued possibility of a major weather-related catastrophe this year, Mr. Adamson added.

"I've seen a few very preliminary signs that people are being a little more prudent in their pricing, but not that many signs," said David B. Proteus, vp-corporate strategy and marketing for Stamford, Conn.-based NAC Re Corp.

Kaj Ahlmann, chairman, president and CEO of Overland Park, Kan.-based Employers Reinsurance Corp., said, "I think in general in the marketplace we see more of the same."

"The property prices are not getting any harder despite the fact there has been quite a series of smaller catastrophes, particularly for regional clients," while other lines remain "more or less the same," said Mr. Ahlmann.

"It's very clear that demand for reinsurance is plummeting," said Sanford Bernstein's Mr. Hicks. Primary insurers "have substantial excess capacity and have less need for true risk transfer reinsurance. I think the premium volume statistics for the industry are being held up by primary business masquerading as reinsurance," said Mr. Hicks, pointing to program business written by reinsurers.

Meanwhile, Mr. Smith of Bear, Stearns said he sees signs of a move toward more quota-share business among smaller reinsurers as a way to boost premium volume. "I think it's cynical demand meeting naive capacity," he said.

"Smaller reinsurance companies are becoming somewhat desperate to show some premium and are willing to write business that otherwise wouldn't be acceptable in the reinsurance market," said Mr. Smith.

John L. Ward, chairman of Cincinnati-based Ward financial Group, is more optimistic about the reinsurance industry's long-term prospects.

"It's a segment that has some very creative and innovative leadership in the industry, and I fully expect that as the segment matures a bit globally that their results and the outlook will in the long run be very positive," he said.

More immediately, though, Mr. Ward said: "I would say the rest of the year would continue about like the first half, and perhaps be a little more negative. There's no end in sight in the pricing declines."

Moody's Mr. Murray added: "For profitability, the outlook is negative going forward because of the deterioration of prices."

Pricing pressure on reinsurers will continue, while a return to a more normal catastrophe year can be expected, with a major catastrophe possibly adding another three points to the combined ratio, forecast Don Watson, director at rating agency Standard & Poor's Corp. in New York.

He predicted that 1997 will turn out to be reinsurers' peak year in terms of financial performance. "We would expect earnings will decline" over the next few years, he said.

Revenues both from premiums and investment income are declining, said Mr. Watson, who added, "Equity returns are not going to help them with any cushion the remainder of the year."

Mr. Hicks of Sanford Bernstein also sees the outlook for reinsurers as bleak. "I think there's very little growth on the horizon. I think you're going to see companies showing declining premium volume, and I think the returns that they generate in the business will deteriorate," he said.

That in turn will "put more pressure on companies to think about consolidation further, as we continue to see, one by one, companies choosing to affiliate or merge," Mr. Hicks said.

Additional merger and acquisition activity is likely to follow last week's announcement of the Partner Re Ltd.-Winterthur Group deal, other observers say.

"It seems like every day someone is consolidating, or someone is acquiring somebody, so I think that will continue over time," said Adrienne W. Reid, senior vp and chief treaty underwriting officer for Zurich Reinsurance Centre in New York. With premium growth very small, "I think people are looking to increase their volume through acquisitions.'