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Retro market shrinks further amid Swiss Re plan to cut back


MONTE CARLO, Monaco—Worldwide retrocessional capacity remains scarce, according to attendees at the Rendez-Vous de Septembre reinsurance meeting earlier this month, and the withdrawal of a major player will serve to exacerbate that shortage.

Swiss Reinsurance Co. announced at the meeting that it would not renew the book of retrocessional business it inherited with the purchase of GE Insurance Solutions from General Electric Co.

While Swiss Re would not comment on how much premium volume it would sacrifice by not renewing GEIS' retro book, GEIS was a major player in that market segment, sources said.

A withdrawal of Swiss Re from GE's participation in the worldwide retrocessional market likely will substantially reduce the amount of such capacity available going forward, said Michael Zboron, managing senior financial analyst at A.M. Best Europe Ltd., the London-based unit of A.M. Best Co. Inc.

The retro market for U.S. property catastrophe and catastrophe-exposed energy business "really has dried up," according to Miles Trotter, an analyst at Best in London.

Jacques Bonneau, chairman and chief executive officer of ACE Tempest Re in Bermuda, said that the retro market for U.S. property cat business is virtually "nonexistent. Capacity at prices and attachment points, from our perspective, are nonconducive to a buy."

"I feel that U.S. catastrophe retro" cover will disappear "unless new capacity comes in," said Robbie Klaus, chief executive officer of Glacier Reinsurance A.G. in Pfäffikon, Switzerland.

Charles Cantlay, deputy chairman of Aon Re UK, a London-based unit of Aon Corp., said that while there has been a "crunch" in retro capacity for risks such as U.S. wind-exposed energy business, there is "plenty" of available capacity for non-U.S. catastrophe-exposed business.

Prices for retrocessional cover are unlikely to increase significantly at the upcoming renewals because rates for that coverage already are so high that if they increased any further, it would become totally unaffordable, according to Seymour Matthews, managing director of reinsurance at Heath Lambert Group in London.

Some capital providers may attempt to find ways to fill the current gap in retrocessional cover, either by traditional or alternative means, observers said.

The tight retro market and high rates for catastrophe business may result in an increase in securitization deals, Best's Mr. Zboron said.

Some start-up companies may seek to provide retrocessional capacity to fill the current gap, according to Matthew Mosher, group vp, property/casualty, at Best.

But he noted that the capital requirements rating agencies place upon retrocessional writers are "onerous"--at about 15% to 20% higher for retrocession business than for other lines.

Sidecar structures provide a sort of retrocessional cover "to an extent," said Mr. Matthews.

Some of the capital that entered the market after last year's hurricanes flowed into so-called sidecars, special limited-time investment vehicles that provide retrocessional capacity, said Ted Collins, managing director of the insurance practice at Moody's Investors Service in New York.

Adrian Ladbury contributed to this report.