This year's light U.S. storm season will not lead to a dramatic improvement in the availability and price of retrocessional coverage, but it may help, observers say.

They note that traditional retrocessional capacity, which largely abandoned the market in the wake of the 2005 hurricanes, has been replaced--but only to a degree--by sidecars, catastrophe bonds and industry loss warranties, which are often supported by hedge funds (see story, page 22).

The already tight retro market was constrained further by Swiss Reinsurance Co.'s announcement in September that it would not renew the book of retrocessional business it inherited with its purchase of GE Insurance Solutions from General Electric Co.

Swiss Re decided to take GEIS out of the retro market to "keep our capacity and our capital for our customers, not for the competition," said Pierre Ozendo, Armonk, N.Y.-based chief executive officer of Swiss Re's Americas division.

Scarcity affects price

The scarcity of retro coverage is one of the factors contributing to property cat reinsurance's continued firmness, observers say.

"What retro market?" quipped Steven K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York.

Chris O'Kane, London-based CEO of Aspen Insurance Holdings Ltd., said, "In the course of this year, we've moved away from being a major buyer of retro to becoming a medium-sized buyer of retro and my guess is we'll continue to move even further in that direction."

"Retro will be unattractive. It will be scarce and overpriced, so we probably won't want to buy, and I think others will reach a similar conclusion," Mr. O'Kane said.

John Gwynn, managing director at Memphis, Tenn.-based investment firm Morgan Keegan & Co., said the availability of retrocessional coverage is "another element of volatility in the final underwriting outcome on these classes of business."

"Obviously, part of that problem is being taken care of through sidecars and bonds and (industry loss warranties)," but none of them "is significant enough yet to replace retro," Mr. Gwynn said.

Mark Rouck, a senior director at Fitch Ratings in Chicago, said the retro market will "continue to be fairly tight at least through the (Jan. 1, 2007,) renewal season."

However, "maybe by the midyear renewals, you might have a better sense of how that market is going to shape out over a more extended period," Mr. Rouck said.

An eye on 2007

Some observers said they believe the situation will improve next year.

Richard DiClemente, president and CEO of New York-based THB Intermediaries Inc., said if the hurricane season ends without significant losses, he expects to see "some loosening up in the retro market for renewals in January" as well as in July.

"We expect some people sitting on the sidelines in anticipation of bad storms may start creeping back into the marketplace" and offering more capacity, Mr. DiClemente said.

"I think it's going to be improving compared to last year," said Steve McElhiney, president of Dallas-based EWI Inc., a reinsurance intermediary. Capacity that would not have been there a year or two ago may reappear, he said.

Retrocessional capacity coming from the capital markets will be a contributing factor, say observers.

Michael D. O'Halleran, chairman and CEO of Chicago-based reinsurance intermediary Aon Re Global, a unit of Aon Corp., said, "There's been new retro capacity in different forms, both from conventional reinsurance but also from the capital market/sidecar activities. It won't be dramatic, but there will be some new capacity available."

Aspen, for instance, plans to explore outside traditional retrocessional capacity and examine alternative sources that include sidecars, catastrophe bonds and ILWs, said Mr. O'Kane.

"We are looking at all of those options," he said.