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By CYRIL TUOHY, managing editor

MONTE CARLO--Jan. 1, 2009, is one renewal date that this year can't come soon enough for cedants. With a market awash in capacity, no natural catastrophe to deplete industry coffers with burdensome claims and primary insurers taking higher retentions, reinsurance prices are expected to drop further still.

It's a good time to be a cedant. How much capacity does there have to be in the reinsurance marketplace when Peter Zaffino, president and CEO of the reinsurance broker Guy Carpenter & Co., can say that a $20 billion loss would be considered "marginal," and that a $50 billion loss would simply arrest the price slide? How high do losses have to be to turn this market? Try $40 billion times four, five or six, that's how high.

"Multiple events of $40 billion-plus will turn the market," said David Priebe, head of sales and capital markets for Guy Carpenter, speaking at a press conference during the annual gathering of reinsurance buyers and sellers in Monaco.

... multiple events ... like hurricanes Katrina, Wilma and Rita of 2005, or hurricanes Charley, Ivan, Frances and Jeanne of 2004. And what kind of chance is there of that before the end of this hurricane season? Very little.

Reinsurance prices peaked in 2006 in the wake of the brutal 2004 and 2005 hurricane seasons. But that was two years ago, and prices have been coming down ever since. Brokers, reinsurers and ratings analysts, said they expect prices for property-casualty reinsurance outside of natural catastrophe peak zones like Florida, for example, to keep dropping well into 2009.

For example, property lines have seen double-digit rate reductions on large accounts and casualty lines have seen single-digit reductions, said Hans D. Rohlf, managing director and chief underwriting officer with the North American Treaty Division of Hannover Re.

Executives with Aon Re Global said they believed rates will fall by between 5 percent and 15 percent for North American personal lines by the time buyers and sellers lock in Jan. 1, 2009, renewals. At archrival Guy Carpenter, Zaffino said price declines would reach the "high single digits," barring any unexpected torment from Mother Nature that would wreak havoc on balance sheets.

And so ... lonely was the dissenting voice of SCOR CEO Denis Kessler who dismissed, at least in public, tales of plummeting rates.

Speaking to The Review, a London-based reinsurance publication, he said "I don't share the view that everything is collapsing. This is pessimistic. Each year at Monte Carlo you have people talking about the return of the cycle and when everything is going to collapse." If there were big declines in the 2008 renewal rates, he'd yet to find them, he added.

Hurricanes, one of the few natural catastrophes with the power to drown a property portfolio in losses overnight, were the subject of scrutiny at the 2008 Rendez Vous de Septembre which is held in the middle of the June-November hurricane season.

No surprise, then, that reinsurers and their brokers were keeping close watch on hurricanes Gustav and Ike. Hurricane Gustav, according to preliminary estimates, was expected to cost well under $8 billion in insured losses, nowhere near enough to affect the downward price trends expected of the January renewals.

Hurricane Ike, which was making its way across the Caribbean in the second week of September, was a different story. "Hurricane Ike--that is the one that needs observation," said Torsten Jeworrek, a member Munich Re's management board.

But even as the reinsurers and the National Weather Service watched to see in which direction Ike would march, the storm couldn't seem to make up its mind as to whether it wanted to maintain a Category 4 spin cycle as it neared Cuba in mid-September or downshift and churn away as a Category 2 or 3 storm as it made its way west toward the Gulf of Mexico.

It was almost as if the natural world were giving reinsurers a reprieve. In the end, the storm, a Category 2 affair, dumped millions of gallons of water onto Galveston and Houston, with its effects felt as far away as Ohio. Damage estimates ranged from $8 billion to $20 billion, hardly enough to cause a change in rates.

The talk at the Rendez Vous wasn't about whether prices would go down or even by how much, but whether price declines might slacken by a percentage point or two to pay for what some experts say are bubbling issues within the industry.

Ratings experts and reinsurance executives say paying for losses connected to subprime lending, drawing down reserves by returning capital to shareholders, the rising cost of capital to supplement reinsurers' investment portfolios, or simply maintaining the underwriting discipline that reinsurers say they swear by, could eventually be enough to slow the pricing descent.

"If the credit crisis persists there could be a post-loss liquidity crunch--particularly for credit," said Chris Klein, head of Guy Carpenter's Global Business Intelligence Unit. By and large the subprime mess, which has embroiled banks in the biggest scandal since the collapse of the savings and loans industry, has spared reinsurers the brunt of its ugly mess.

For the moment, therefore, the mortgage scandal remains an "earnings event," one that will likely continue to affect quarterly earnings reports for the next several quarters, as opposed to a "capital event," or one that will send reinsurance managers scrambling to replenish their capital base, analysts said.

So far as cedants were concerned, this was one Rendez Vous with a happy ending.

October 15, 2008

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