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Global reinsurers will post healthy profits in 2007 despite a softening market and most should retain their stable outlook for 2007, according to a new report issued by A.M. Best Co.

"Pricing is good in the property area and margins are still adequate," said Assistant Vice President Bob DeRose. But DeRose said that pricing among casualty lines was deteriorating more quickly.

But the analysts cautioned that the industry could soon find itself in a nasty fight to lower prices as reinsurers compete more aggressively for the business of primary insurers.

Prices have already deteriorated with the July 1, 2007 renewals, as ceding companies retain more risk. "That's good news for the cedants," said DeRose, "What everybody has to keep in mind is that there has to be a degree of margin for all or ultimately the marketplace will have disruption."

The 2007 hurricane season has been relatively quiet so far, with only one tropical storm, Erin, touching the United States. However in August Hurricane Dean smashed into the Yucatan and Mexico. England was affected by severe flooding.

The A.M. Best report also noted that property/casualty insurance prices for lines outside of noncatastrophe-exposed areas could soon tumble.

"The optimism for longer-term robust performance from the reinsurance sector is somewhat dimmed due to the resounding sentiment that market conditions will continue to deteriorate, particularly for noncatastrophic-exposed business lines," the report said.

"Casualty is deteriorating more quickly," said DeRose. Whether margins are still adequate is "debatable," he said.

The doubling of capacity by the Florida Hurricane Catastrophe Fund has not had the dire pricing consequences that critics had predicted, the analysts also said.

"Buyers are still buying reinsurance as additional cover," said John Laubach, senior financial analyst with A.M. Best. Still, the report notes that as catastrophe premiums move to the FHCF, reinsurers may be forced to shift capacity to noncatastrophe-exposed business. That would create more price competition in the market.

Whether prices soften, whether margins erode beyond the industry's ability to generate adequate returns, and whether Swiss Re, the world's No. 1 reinsurer sticks to pricing discipline, one outcome is preferred over all others: no losses.

October 15, 2007

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