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No letup

No letup

Despite strong overall reinsurer results and a light U.S. hurricane season this year, there will be no rate relief in property catastrophe reinsurance for primary insurers and risk managers with operations in cat-prone areas, industry observers say.

Lingering concerns about the prospects of hurricanes and other catastrophes, strong demand, a shrinking retrocessional market, new catastrophe models and rating agency requirements will combine to keep property cat reinsurance rates high in the coming year, experts say.

Reinsurers will seek to raise rates during January 2007 property cat renewals to those introduced in June and July, when dramatic hikes were imposed.

Meanwhile, observers say the business remains largely bifurcated, with casualty rates expected to remain either flat or decline slightly (see story, page 16). In addition, the shortage of retrocessional capacity has led to more sidecars and other alternatives backed by hedge funds, whose involvement in the industry is generally expected to continue at least until the property cat market softens (see story, page 22).

Most industry watchers expect relatively little at this point in the way of either new reinsurers or merger and acquisition activity (see story, page 34).

Right now, it looks like reinsurers' 2006 results will be "very positive and very strong," said David Priebe, chief executive officer-Europe for New York-based reinsurance intermediary Guy Carpenter & Co., a unit of Marsh Inc. Everyone "should be looking ahead at '07 with a fairly strong, bullish attitude in terms of ongoing business."

"We see a fairly stable market, a stable renewal outlook, with probably terms and conditions improving from a buyer's standpoint modestly into '07," Mr. Priebe added. The exception is the area of peak zone catastrophe risks, "which continues to be constrained in terms of overall demand vs. supply."

Split market

Patrick J. Denzer, president and CEO of intermediary John B. Collins & Associates in Minneapolis, said, "I think what we will see is a continuation of the two different markets that effectively exist."

One is peak zone property cat business, where "we'll continue to see some hardening of rates" next January vs. last January. The second reflects other areas, including nonpeak property and casualty lines, where rates will be flat to down, Mr. Denzer said.

"I think we just have to wait to let the market absorb the mild cat season and see where that takes us," he added.

"What is remarkable and very encouraging" is that the reinsurance market remains "quite disciplined," said Pierre Ozendo, Armonk, N.Y.-based CEO of Swiss Reinsurance Co.'s Americas division. There is "not a lot of foolishness" despite some price competition in shorter-tail and lower-risk casualty lines, plus contract wordings remain firm, said Mr. Ozendo. That "should give us the opportunity to keep things in pretty good shape."

Property cat rate increases will not be as high in January as they were this summer, most observers say. Instead, reinsurers will focus on bringing those renewals nearer to midyear 2006 levels.

"I think most people would agree the pricing levels in July were the best ever" for reinsurers, said Steven K. Bolland, president of reinsurance intermediary Gill & Roeser in New York. "If nothing happens between now and the end of the year, I don't think reinsurers will see those pricing levels at Jan. 1 because they were truly amazing, for the U.S., anyway," he said.

Mr. Priebe anticipates "there'll be some movement upwards on the January programs, bringing them more in line with what we saw at midyear. We may find a point in between the two, but I don't think pricing will be flat" in peak catastrophe zones.

Property cat will play catch-up with the July renewals, agreed Chris O'Kane, London-based CEO of Aspen Insurance Holdings Ltd. Reinsurance buyers in July paid up to 60% more than January buyers, "so there's a pretty significant difference."

William H. Eyre Jr., managing director and CEO of reinsurance intermediary Towers Perrin Reinsurance in Philadelphia, agreed "there is an element of catch-up" for the January 2007 renewals.

"I think all indications are that reinsurers, for this Jan. 1, are going to be focusing on the clients' exposures," and their 2005 hurricane loss development since last year's fourth quarter, said Mr. Eyre.

Expectations very different

John Gwynn, managing director at Memphis, Tenn.-based Morgan Keegan & Co., pointed to a disparity in expectations. Reinsurers say they expect further rate increases--in some cases significant hikes, while primary companies "are all saying 'We got hit pretty hard midyear and we're assuming because there are no storms that we're going to get some relief."'

"I've never seen such divergence in the expectations before," said Mr. Gwynn, who added, "I think they'll split down the middle. We'll see some rate increases, but probably not enough to make the property reinsurance business an attractive, long-term proposition."

William J. Adamson, CEO of reinsurance intermediary Carvill America Inc. in Chicago, said he sees no major changes despite a mild year for catastrophes "because there's still such a shortage of capacity in peak zones for natural perils." Carvill estimates the capacity shortage in peak zones still totals close to $50 billion despite the mild cat losses so far this year.

Fear of future catastrophes is one factor influencing the property cat rate environment.

John L. Ward, CEO of Cincinnati-based Cincinnatus Partners L.L.C., an advisory firm that specializes in the insurance industry, said, "The industry is still very fearful of a stepped-up level of cat activity, in terms of both frequency and severity, and until the outlook--the expectation for cat activity--changes, I think we're going to continue to see rates be firm," he said.

Some point to the possibility of devastating earthquakes, despite the recent focus on hurricanes. Last month, for instance, Hawaii was jolted by a magnitude 6.7 temblor.

The quake, which caused little damage, is expected to have little if any impact on the reinsurance market, although "it might make one or two people think about earthquakes," said Mr. Bolland.

"I'm hearing more and more talk about earthquake exposure, and the potential for earthquake catastrophes," Mr. Ward said.

The Northridge, Calif., earthquake was 12 years go, said Steve McElhiney, president of Dallas-based EWI Inc., a reinsurance intermediary. Subsequent quakes "are overdue" while modeling in this area is "somewhat limited," he said.

The light catastrophe season "doesn't change the long-term expectations" of catastrophes, said Aspen's Mr. O'Kane. "The pricing models are there, and it's not going to change just because we were lucky for one year." Furthermore, the rating agencies' stringent capital requirements remain in place. "It's difficult to cut prices if you can't cut the capital," he said.

However, some observers say reinsurance rates may decrease in January.

"I think the profitability of the reinsurers, particularly in Bermuda, will be phenomenal through the storm season, and it's going to be a lot of downward pressure" on rates through 2007, Mr. McElhiney said. "It's quite conceivable that rates could go down" by about 2% to 3%, he said.