SEATTLE—Reinsurers and primary insurers are engaged in a low-key tug of war over property catastrophe rates for the January renewals.

Reinsurers are pushing for rate increases equal to the hikes introduced at midyear, citing capital pressures created by rating agency demands and catastrophe models.

Cedents, for their part, point to a highly profitable year for reinsurers marked by relatively few catastrophe losses as justification to keep property cat rate increases down.

At the same time, there is general agreement that although capacity has increased during the past several months, supply is still inadequate to meet the market's needs.

The final outcome, say observers, is likely to be somewhere in the middle, with rate increases somewhat less than those instituted in July.

People are "trying to figure out where's the happy medium in terms of where pricing settles," said Tim Gardner, managing director and leader of the global property specialty practice for Guy Carpenter & Co. Inc. in New York.

Meanwhile, property lines in areas not prone to catastrophes, as well as casualty lines, continue to soften, perhaps influenced in part by property catastrophe reinsurers' efforts to diversify in response to rating agency pressures, say observers.

The market, however, continues to remain disciplined, observers say (see story, page 14).

Meanwhile, the retrocessional market remains significantly diminished, although hedge funds and other private equity sources are expected to continue to help fill the capacity gap through the use of sidecars, industry loss warranties and catastrophe bonds.

Most observers say they expect the January renewals to be completed on time.

These were among the topics under discussion by participants at the Property Casualty Insurers Assn. of America's annual meeting in Seattle earlier this month. Reinsurers, insurers and intermediaries use the occasion to begin negotiating January renewals.

"It's been a fairly easy conference," said Mr. Gardner. "There aren't a lot of issues," unlike past conferences where terrorism and catastrophes dominated discussions.

"This convention has been fairly smooth and orderly, with meaningful discussions on clients' experience and exposures," said William H. Eyre Jr., managing director and chief executive officer of Philadelphia-based Towers Perrin Reinsurance.

"Property catastrophe is still the overwhelming topic, and reinsurers are seeking to find out what changes took place for the cedents with the new modeling updates," and want to see if there are any further developments from last year's catastrophes, said Mr. Eyre.

Increases likely to vary

Meanwhile, "brokers are still trying to talk down the rate hikes" while reinsurers are "talking it up," Mr. Eyre said. The increase cedents face "depends on the model changes to their exposures and their experience."

Initially, there was talk about price increases at January renewals being about the same as those introduced midyear, but now, "I don't think that will happen," said Paddy Jago, New York-based CEO of Willis Re Inc., the reinsurance unit of Willis Group Holdings Ltd. "I think the reinsurers are trying to talk it up, but I think that there are a fair proportion of insurers" who are pointing to a benign hurricane season and reinsurers' record profits.

As a result, if cedents are "faced with extortionate increases" they may "vote with their feet" and go to second-loss covers rather than first-loss covers "and do their best not to buy reinsurance," said Mr. Jago. They also may seek alternative risk transfer mechanisms, he said.

Property cat rates "will be up over (Jan. 1, 2006), but not as bad as at midyear '06 renewals," said Patrick J. Denzer, president and CEO of Minneapolis-based John B. Collins Associates Inc. Rate hikes will be 10% to 20% off of midyear pricing, "depending on the type of client," he said.

Things are more settled now than they were at midyear, said Bryon Ehrhart, president and CEO of Aon Re Services Inc. in Chicago. There is more capacity, and the market has had the time now to respond to rating agency demands and catastrophe models. Furthermore, reinsurers have had an "extremely profitable" year, Mr. Ehrhart said.

"The reasons for the price increases have not gone away," though, said Matthias Weber, senior vp and head of property underwriting at Swiss Reinsurance America Corp. in Armonk, N.Y.

This year's weather has been helped by El Niño, a warm current of water that appears every three to seven years in the eastern Pacific Ocean. However, its effect lasts only six to 24 months and once that is over, "we are back to where we were in 2005," said Mr. Weber.

Michel M. Lies, head of client markets at Swiss Reinsurance Co. in Zurich, Switzerland, said the possibility of late-year winter storms in Europe remains as well, noting late December storms that hit Europe in 1999.

Meanwhile, ceding companies' retentions, which have increased dramatically over the past few years, "should start to come down over the next renewal cycle" while limits "could go higher," said Steven M. McElhiney, president of Dallas-based EWI Inc., a reinsurance intermediary.

Companies will hold less net exposure because they will be able to fill up their programs, said Paul Karon, CEO of Benfield Group Ltd.'s U.S. division in Minneapolis. Last year, he noted, some companies were able to fill only part of their programs.

Observers say there is still a capacity shortage overall in the reinsurance market, though. Between increased demand and decreased retrocessional capacity, "it could be that the shortfall of available capacity actually increases" as of Jan. 1, 2007, said James Few, chief underwriting officer and head of property reinsurance at Aspen Insurance Ltd. in Bermuda.

Guy Carpenter's biggest clients are putting together "almost a patchwork quilt" of reinsurance coverage supplemented by cat bonds, private placements and ILWs, said Mr. Gardner.

Meanwhile, assuming no major catastrophes, the property cat market should start to soften by January 2008, he said.

Scarce retro capacity

Retro capacity in particular remains scarce, say observers. "I certainly don't see any weakening of retro pricing," said James H. Veghte, chief executive officer, reinsurance general operations, for XL Re, a division of XL Capital Ltd., who is based in Stamford, Conn.

There is "limited to very limited" capacity available in the retrocessional market, said Mr. Denzer.

William J. Adamson, CEO of reinsurance intermediary Carvill America Inc. in Chicago, said insurers are turning to alternatives because the traditional market has decreased so significantly.

"There is a retro market," said Mr. Jago. "Early talk of its death is a little premature," although it is a lot smaller than it was previously. But because of supply and demand, it is inevitable that someone will offer it, he said. The Berkshire Hathaway Group, for instance, offers retrocessional security, "albeit at a price."

Meanwhile, Steven K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York, said he anticipates a late renewal season. "I think it's going to be late and it's going to be ugly," he said.

Not only are people waiting until the hurricane season ends at the end of this month, they're also waiting to let someone else be first in line, Mr. Bolland said.

However, Mr. Eyre said, "I would say that this will not be as late a renewal season as the past two years, since there is a need to access capacity sooner rather than later." Before last year's renewals, he said, people were still awaiting developments from Hurricanes Wilma and Katrina, coupled with some uncertainties as to whether the Class of '05 reinsurers would have their capital in place by Jan. 1.

"I think most brokers and clients are working towards getting renewals done well before Jan. 1," Mr. Eyre said.

Last year, there was "such a state of turmoil" because of changes to catastrophe models and rating agency capital requests, said Mr. Gardner. But, "at this point, it feels like we're in pretty good shape." There is not a "big disconnect between buyers and sellers right now. I think the expectation is that it should move pretty smoothly."