Clearing after the storm: with reinsurance renewals looming, the industry prepares for the return of a firmer market.

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In a grim reminder of 2005's destructiveness, the 2008 Atlantic hurricane season caused insured losses up to $25 billion--$13 billion for Hurricane Ike alone--and could affect 2009 reinsurance renewal rates.

But the just-concluded season may pack less of a punch than the multiple natural catastrophes ha the first hall of 2008 and the stormy world economy that followed.

Reinsurers are keeping their renewal rates close to the vest until January 2009. Yet many are posting third-quarter losses in the wake of hurricanes Ike and Gustav, the standouts of this year's hurricane season.

Gustav landed near Cocodrie, La., Sept. 1 as a fast-moving Category 2 hurricane with maximum sustained winds of 110 mph. Ike made landfall on Galveston Island, Texas, Sept. 13 as a much wider and slower-moving Category 2 storm, with sustained wind speeds near 110 mph and a 13-foot storm surge.

With estimated losses between $13 billion and $21 billion, Ike could become the third-costliest hurricane in U.S. history after Katrina and Andrew. According to catastrophe modeler Risk Management Solutions, when late-October claim figures proved Ike to be more destructive than anticipated, RMS revised its loss estimate from an initial $7 billion to $12 billion.

However, the credit crisis likely will prove more costly to reinsurers than Ike, said Paddy Jago, chief executive officer of Willis Re. By itself, Ike is "no more than a flesh wound" to the reinsurance market, whereas the credit crisis is "much more meaningful," he said.

It's a scenario no one saw coming. While insurers and reinsurers were watching the Gulf of Mexico for tropical storms, a financial tempest of epic proportions--the subprime fallout, credit default swap debacle and stock market meltdown--was brewing almost unnoticed.

"It's strange, isn't it?" Jago said. "As they were looking perhaps at the underwriting risk, all of a sudden the investment risk they clearly have on their balance sheets and their assets took a battering from somewhere they didn't suspect."

The Willis Group's 2008 Marketplace Realities and Risk Management Solutions: A Different Kind of Cat, which Jago co-authored, opens with a philosophical slant: "A whole different kind of hurricane blew through the insurance industry this past September ..."

A more pervasive storm, too. The credit crunch has affected everybody, whereas Ike only affected those in its path, Jago pointed out. In the broader picture, however, Willis expects no further softening of the reinsurance market. The market may firm up, but "it certainly won't soften anymore," he said. "It may well uptick."

Firming Rates

Guy Carpenter's World Catastrophe Reinsurance Market 2008 predicts reinsurance rates will decrease at a slower pace in 2009 than in 2008, as reinsurers face earnings pressure from various sources.

Rates dropped for the second year in a row--by 10% on average in 2008--due to intensified price competition as a result of "abundant capital, lower than average catastrophe losses, and strong overall profitability," the report stated. It also cites the "meltdown" of the subprime mortgage market, the credit crunch and the ensuing stock market plunge as having had "a profound impact on the industry."

But the report was released prior to Hurricane Ike. If insured losses related to Ike come in at $20 billion, "this could penetrate the retro market and attach to some sidecars," said Christopher Klein, Guy Carpenter's global head of business intelligence. Another critical factor is an $8.1 billion estimate from ISO's Property Claim Services, which is used to set parametric triggers for industry loss warranties and insurance-linked securities.

The PCS's estimate is not expected to be reviewed until early this month, he said. However, "While the industry is well capitalized, if Ike comes in at $20 billion, this may contribute to factors that would cause a turn in market conditions," Klein said.

The combination of Hurricane Ike, the credit crisis and potentially increased demand--a derivative of the credit crisis--will at least firm the market, and probably cause some moderate hardening of rates, said Pat Denzer, president and CEO of Minneapolis reinsurance broker John B. Collins Associates. Still, it's hard to say if the market will indeed harden, because that would be driven by demand. Buyers looking at their ability to recapitalize after an event are finding it more difficult than in the past, he added.

"We see the end of rate decreases coming," Denzer said. "Buyers coming in would substantially increase the need for capacity, and that would cause some upward movement in pricing."

Unexpected Hit in Midwest

In itself, Hurricane Ike was "a very substantial event" and the wide swath that it cut from Texas to the Midwest was something that no one, not even modelers, could have anticipated, Denzer said. "A substantial part of the losses coming from Ike were hurricane losses from companies that had no idea they really had hurricane exposure."

According to the National Oceanic and Atmospheric Administration, Ike's remnants whipped across Indiana on the afternoon of Sept. 14 with sustained winds up to 40 mph, and gusts up to 70 mph. Ike took down trees and power lines, leaving thousands of Mid-westerners without power for days.

Ohio reported the second-most storm damage after Texas, said Jonathan Reiss, a partner and insurance leader for Ernst & Young in Bermuda. "This wasn't modeled--this level of additional losses coming from Ohio. That impacted some companies in a way they certainly didn't expect."

But will it be a contributor to a reinsurance rate hike? After Katrina in 2005, property/casualty reinsurance rates in the United States took a huge spike upward, but Reiss doesn't expect to see the same occur in 2008. "You may see it going up, but not a big, huge, dramatic spike. I think that's the difference."

Advisory firm Deloitte LLP estimated insured losses from Ike to be $20 billion to $25 billion, including the National Flood Insurance Program's losses. Deloitte said around $10 billion to $20 billion will go to the commercial insurance and reinsurance industry, and the balance to the NFIP.

Deloitte also said Ike would cause the third-largest insured hurricane loss, and probably the fourth-largest insurance loss of all time, after Katrina, the 9/11 terror attacks and Hurricane Andrew in 1992.

In fact, the 2008 storm season could get close to 2005 in terms of cost, said Howard Mills, chief adviser for Deloitte's Insurance Industry Group. (PCS estimated 2005 total catastrophe losses at $56.8 billion, the highest on record.)

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Business interruption due to the massive power outages and cleanup may be the largest costs from Ike, Mills said. "It's had a pretty significant impact on reinsurance."

Ike did hit the Gulf hard. Oil industry damage estimates to offshore platforms and onshore facilities were still coming in last month. The storm wiped out 49 of the roughly 3,800 offshore oil and gas production platforms In the Gulf of Mexico.

According to oil industry Web site Rigzone.com, those 49 production platforms produced a total of 13,000 barrels of oil and 84 million cubic feet of gas per day. That loss has yet to be assessed.

"This certainly wasn't a Rita-Katrina-Wilma type of year, but there has been a lot of activity with flooding in Europe and windstorms," Mills said. "There was not any one event ... but it's turning out to be a pretty expensive year."

A Stormy First Half

Multiple events already had taken their toll on the insurance industry early in 2008. The United States saw a record number of tornadoes in the first six months of the year, and heavy rain, hail and flooding in the Midwest caused billion-dollar losses.

A Toronto factory fire was another of "quite a few" industrial mishaps in 2008 that contributed to major commercial losses, Reiss said. "The companies writing commercial property coverage had felt a chunk of claims activity. It's certainly an uptick relative to previous years," he said.

Industrywide, 2008 will finish with one of the highest amounts of total insured losses, said Lloyd's spokesman Bart Nash. However, "A lot of these are not catastrophe losses, and Lloyd's has limited exposure to these losses," he said.

The London-based insurer expects a "negligible" impact on capital, with estimated net claims of $2.34 billion for both onshore and offshore claims due to Gustav and Ike, Nash said.

Aon, which posted a 1% hike in organic growth for its reinsurance operations during the third quarter, is feeling pressure that did not exist during its second quarter, President and CEO Greg Case said during an Oct. 31 earnings webcast.

"Despite difficult market conditions, risk is increasing," Case said. He cited deteriorating asset values, pressure on investment returns, higher capital costs and rising combined ratios, as well as Ike and Gustav, which "have probably come in at higher claims than was initially estimated."

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"We still view this as 'time's going to tell'," Case said to investors. "We'll see how this evolves over the coming months. We clearly see more stability in the overall pricing structure right now."

The credit crunch has eaten into the excess capacity that existed in the industry earlier in the year, Reiss said. "It's the balance sheet drama done by the credit crunch, along with the inability to no longer assume you can raise cheap, easy capital after an event," he said. "And combine that with Ike and Gustav, and you have a different environment than you had four months ago."

Wiser in 2009

Willis Re's Jago hopes the reinsurance industry takes a more measured response to the changing market and not the "knee-jerk reactions" that followed the natural catastrophes of 2005.

His advice for 2009: "Preserve the capital that you've got."

It will be difficult for either the primary or reinsurance markets to raise capital, but both primary and reinsurance companies may use reinsurance and retrocessional insurance in order to carry on with their business plans and take advantage of opportunities, Jago said.

"It's not just a pure loss of capital that's coming into play," Reiss said. "I think the other real big factor here is that nobody can feel comfortable that they can go out and raise new capital easily. In the past you could."

Previously, reinsurers talked only about underwriting discipline, Jago said. "It's quite interesting that you can be as disciplined as you like underwriting a book of business. Then out of left field comes a thunderbolt that can all but collapse your company."

There's also a greater strain on adequacy ratios than before, and where creditworthiness was once taken for granted, it is no longer, he added. He predicts a greater return to the subscription system, in which cover is placed with multiple carriers rather than one to spread the risk.

"It will be a case of not putting all your eggs in one basket," Jago said. "Where the quality of security is still extremely important ... you'd like to see more markets participate in the reinsurance program than less."

* The Situation: Even without a single Katrina-level catastrophe, insured losses from 2008 could come uncomfortably close to those of 2005.

* The Upshot: More costly for reinsurers may be overall commercial claims for the year combined with the ongoing financial crisis.

* The Outcome: Speculators see renewal rates firming for 2009, coupled with a scarcity of capital resources.

Eye of the Storm

Hurricanes Gustav and Ike triggered reinsurance payments this year
from at least eight firms. Some figures are estimated.

Company                 $ Loss          Gustav             Ike

                                 ($Millions)

Everest Re       $200.0-$220.0   loss figures are combined
Hannover Re             $312.6           $37.6          $275.0
IPC Holdings            $109.7            $3.7          $106.0
Munich Re               $488.0          $113.0          $375.0
Odyssey Re               $78.0   loss figures are combined
Renaissance Re          $276.0           $44.6          $231.4
Swiss Re                $365.0           $50.0          $315.0
XL Capital             $2228.0           $27.4          $195.4

Sources: Company reports; A.M. Best credit reports