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By CYRIL TUOHY, managing editor

Reinsurance prices are declining, and the boys at Swiss Re have just about had enough. They're not going to play any longer. They'd rather walk away instead of haggling with cedants over $10 million here and $10 million there--Monopoly money in the scheme of things.

"In the soft cycle, Swiss Re wrote business that they shouldn't have," he said in early September at the annual meeting of reinsurance buyers and sellers in Monte Carlo. "Now we'll leave business on the table." Seems like for the time being the big boss at Swiss Re is in no mood for compromise.

Tough talk from executives of the Zurich-based firm, which spent the first half of 2008 digesting billion-dollar losses connected to the subprime mortgage mess and much of 2007 grappling with the aftermath of the purchase of GE Insurance Solutions.

Aigrain and Michel Liès, head of client markets, said Swiss Re would stick to chasing quality instead of volume, deploying capital only to business they believed was properly priced. And they weren't budging, not not one bit.

"In the continuing challenging market environment, Swiss Re will continue to serve its clients and to focus on disciplined underwriting," said Liès. "Therefore, preserving margin is the priority even if it means lower volume."

The margin/volume story was much the same among Swiss Re's two largest European-based competitors to the north, Munich Re and Hannover Re: We've had enough, and if we can't get the price we want, we're going home.

Torsten Jeworrek, a member of the Munich-based reinsurer's management board, admitted that profits in the industry are not as easy to come by today as they were in the past. But he insisted that Munich Re was "maintaining an underwriting discipline," and that, like Swiss Re, was exiting business "that does not offer risk-adequate prices and conditions."

"Munich Re will maintain its underwriting discipline in every phase of the cycle," said Jeworrek, at the Rendez-Vous de Septembre in Monte Carlo, where reinsurance buyers and sellers gather every year to discuss deals and pricing for the new contract renewal season beginning January 1.

Munich Re is the world's No. 1 reinsurer with $30.2 billion in net reinsurance premiums written in 2007, according to Standard & Poor's.

The road for property/casualty reinsurers has been paved with riches since 2006 at least, after the reinsurance industry raised rates to pay for losses incurred in the 2004 and 2005 hurricane seasons, which cost reinsurers tens of billions of dollars in the United States alone.

The higher prices have allowed reinsurance companies to recapitalize and to stash away billions of dollars in reserve.

But since their peak, rates have been coming down. In 2008, through each major renewal period--Jan. 1, April 1 and July 1--prices have declined by double digits year over year, according to the Guy Carpenter World Rate on Line index.

The declines were reflected in the companies' income statements. In the first half of 2008, profits raked in by the world's five largest reinsurers fell by 39 percent compared with the same period in 2007, according to Munich Re.

With profit margins coming under more pressure, reinsurance executives agreed life was getting tougher but insisted their products and services were still adequately priced to generate an acceptable return for property/casualty investors.

Discipline, discipline, discipline were the words of the day.

Of course, the Europe-based biggies could simply raise rates too. One line of coverage, aviation, has actually seen a slight rate increase, according to Ulrich Wallin, a member of the executive board of Hannover Re.

The increase is due to the soaring severity of claims as the amount of compensation airlines pay victims around the world catches up with the compensation typically paid out to victims of aviation accidents in the United States and Europe.

The upward claims cost trend in the liability classes of medical inflation is also of particular concern, according to Aigrain.

But for the moment when it comes to property/casualty reinsurance, it's clearly a buyer's market, and with so much capacity available, it's going to take multiple hurricanes each inflicting between $40 billion and $50 billion worth of property damage for rates to do an about-face, according to one reinsurance broker.

In a tongue-in-cheek piece meant to underscore just how soft rates have become, a writer for one London-based publication went so far as to mourn the passing of Hurricane Gustav and the relatively minor damage it inflicted on the United States.

"Why oh why did it have to weaken and die out?" asked the writer. "This was our one big chance to put the brake on rate decreases. Sometimes life seems so unfair."

Damage from the storm, according to a range of estimates, will come in at less than $8 billion, well short of the $60 billion in insured losses inflicted by Hurricane Katrina in 2005, and certainly not enough to turn the market.

Even Hurricane Ike, which at one point seemed to be the Second Coming of Hurricane Katrina, lost some of its punch by the time it made landfall. Although losses in the United States and among the oil and gas businesses in the Gulf were substantial, they were clearly within the ability of the insurance industry to cover.

As Texas residents spent the week following Ike's landfall cleaning up the mess, industry analysts seemed taken more by the near-collapse of AIG than Ike's lingering effects on property/casualty rates.

For all the attention bestowed on hurricanes Gustav, Hanna and Ike, ratings agencies say the storms will ultimately simply factor as just one more earnings event, according to Fitch Ratings.

Not only are insured losses from the hurricanes not nearly big enough to put a dent in the capital base of the reinsurance industry, but the primary carriers are expected to bear the brunt of the losses from this latest round of storms, according to David Stephenson and Mark Rouck, directors at Fitch Ratings, in a report titled "Global Reinsurance Review & Outlook."

While reinsurance executives spent much of their public appearances in Monte Carlo trying to reassure the markets and investors that their products and services were adequately priced and that they'd accumulated a healthy reserve to pay future claims, the question on everyone's mind was how reinsurers would continue to turn in profits in 2009 the face of inexorable rate declines.

For the moment, the money reinsurers are charging cedants is adequate, and reinsurers are expected to end 2008 in the black, particularly if the year finishes without a big natural catastrophe, according to Rouck, senior director with Fitch's insurance ratings practice.

"While underwriting margins are likely to continue to erode over the near-term, unless there is a major catastrophe event, the sector will continue to generate reasonable returns on capital," he said. Fitch has a stable outlook on the industry, as do S&P and A.M Best & Co.

But the ratings analysts noted that rate adequacy is eroding quickly, and that it's just a matter of time before reinsurers take action or face the consequences of a downgrade.

"The choice is clear," write Standard & Poor's analysts Peter Grant and Laline Carvalho. "Rate adequacy is shrinking across most lines. Either the industry successfully stabilizes rates in 2009 or it faces lower ratings."

Analysts said they would not hesitate to issue downgrades to the industry as a whole if the economic conditions deteriorate.

Mindful of the markets, executives with the large European reinsurers appear to have made their decision.

They're more than happy to pass on the business and just take a walk, market share concerns and competition from the Bermuda reinsurers be damned.

October 15, 2008

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