Rates under pressure: January renewals hint at a mild downturn for reinsurers in 2007.

Following an unexpectedly benign 2006 Atlantic hurricane season, the reinsurance market is facing the new year with slightly more optimism than it might have expected. But the good news that losses were mild carries with it a sense that market softening is setting in, a sense that was reinforced at January renewals.

The slow 2006 Atlantic hurricane season, which contrasted so strongly with the havoc that various storms wrought in 2004 and 2005, resulted in few catastrophe payouts and large profits all around in 2006. Swiss Re, the world's largest reinsurer, said the capacity situation remains balanced, and that shareholder capital for nonlife primary insurance in the United States, Canada, Japan, the United Kingdom, Germany and France added as much as 710 billion [euro] (about $920 billion) in 2006.

But early evidence coming out of January renewals suggests most nonlife reinsurance lines are softening, and that even property catastrophe conditions are under pressure everywhere except in U.S. windstorm-exposed areas. Add to the mild 2006 claims experience the fact that cedants are retaining more of their risk, and the competition from new capital flowing into the market, and rate pressures likely will continue through April, July and September renewals as well.

The Brokers' Story

Brokers cited similar findings for the January renewal season. Benfield Group said it has seen "orderly" renewals at the start of the year, with reinsurance capacity more than adequate even for peak exposures. In a report on the state of the market at the start of 2007, Benfield said the orderly nature of January renewals was an accomplishment, given the lack of major losses in 2006.

"Back in Monte Carlo last year there was an expectation that the wind was going to blow," Lewis Phillips, from the Industry Analysis & Research team at Benfield and one of the authors of the company's report, told Best's Review. "Well, it didn't, so there were no real losses. Consequently the renewals, from our perspective, were surprisingly orderly."

There were "lots of loose ends hanging around for some time around renewals" last year, said Phillips. "This year many of the renewals were put to bed before the end of 2006:

Phillips said there is still plenty of capacity for most risks. "There have also been price reductions in pretty much all areas, with the exception of Florida wind and other U.S. Gulf-related areas," he said. "In the European region, pretty much the only places where there were increases in property and casualty rates were Austria and Romania, due to local events like flooding."

Willis Re described 2007 renewals as a "tipping point" for the market. According to Peter Hearn, Willis Re's chief executive officer, buyers and sellers of reinsurance are taking advantage of a hall in natural catastrophe activity to shore up the bottom line. Rising investment yields are augmenting positive underwriting results for many of them.

"This positive outcome is nurturing increased competition and, as a consequence, many of our clients are seeing a stabilization of, or a reduction in, their reinsurance rates," said Hearn in a statement.

Charlie Cantlay, deputy chairman at Aon Re in London, said that from Aon's standpoint the market has peaked. He said that in some areas of the market Aon was seeing reductions, and that in others, increases had not been as high as some people had predicted.

Cantlay added that the next insurance cycle would not have the same steep peaks and troughs as past ones, as the amount of science and information about what was going on in the market had increased a great deal, which would smooth some of the fluctuations.

Sean Mooney, chief economist at Guy Carpenter & Co., said the company had seen smooth renewals, especially when compared to 2006. Mooney said there are three trends to the market. First, there had been a perceptible softening of rates, particularly in property. Second, the market seemed to be more discriminatory and less "broad brush" when it came to looking at risks. And third, there seemed to be a discrepancy between the primary market, where rates were softening, and the reinsurance market, where reinsurers were "less inclined to grant rate decreases."

Mooney does add a caveat. Windstorm Kyrill, which had smashed its way across the United Kingdom and parts of Europe in mid-January, churned up estimated insured losses of between $5.2 billion and $10.4 billion, according to some catastrophe models. Ice storms in the United States at about the same time likely will add significant costs to some insurers and reinsurers as well.

The 2007 reinsurance market likely will be affected by the amount of losses from these events, said Mooney.

Early Reinsurer Signals

Most reinsurers won't report January renewals until after this edition of Best's Review has gone to press. One exception was PartnerRe Inc., which said it saw a slight decline in premiums at Jan. 1 renewals, as cedants retained more of their risk and competition heated up in some lines.

The Bermuda-based reinsurer wrote and bound about $1.8 billion of nonlife premium in the January renewal season, a 4% drop from the previous year on a constant foreign-exchange basis. The reinsurer estimates that the business renewed in January represents 55% of its total nonlife business, roughly the same percentage as last January.

"Overall, we found the market to be orderly at Jan. 1," said Patrick Thiele, PartnerRe's president and chief executive officer, in a statement. "A significant amount of business-about 10% of our renewable premium-left the reinsurance market as cedants continued to retain more risk. Despite this, competition at the reinsurance level was reasonable." Thiele added PartnerRe expects competition in all lines to increase over 2007.

Speaking at a January meeting in Switzerland, Ann Godbehere, Swiss Re's outgoing chief financial officer, commented that 2007 renewals were "very late" in January. A Swiss Re spokesperson later elaborated that a number of clients waited until late in the year--December or even January-to sign contracts, particularly medium to small companies.

Godbehere said at the January meeting that reinsurance terms and conditions were generally stable, but that there was some pressure on terms agreed to in 2006. Swiss Re also saw higher client retentions and some shift to excess-of-loss structures. While U.S. property catastrophe rates are up from January 2006, prices are near the July 2006 peak, she added.

European windstorm rates for large global programs remained firm, while pricing for other perils fell between 5% and 10%, according to Swiss Re.

German reinsurer Hannover Re hinted that it expects good results from renewals in recent comments about the financial outlook for 2007. The company expects full-year gross written premiums for 2006 to have risen by 5%, and estimates it will report a return on equity "well above" 15%, according to CEO Wilhelm Zeller, whose comments were contained in a summary made available ahead of a company presentation to investors.

Zeller expects the company's return on equity to stay high in the current year, saying it will be "at least" 15%. Hannover Re also expects to report earnings per share of around 4 [euro] for 2006, up from 0.41 [euro] in 2005,

Zeller told investors at a conference hosted by Swiss broker Helvea. Zeller summarized his view on the company's performance last year, and his expectations for the current one, saying both will be "vintage" years.

He sees 2006 as the peak of the cycle, and that rates for reinsurance in most markets probably will come down. But despite expecting pressure on premium income, Zeller was confident about profits, saying: "We still think we can grow our earnings in '07"

He added, "If an analyst predicts our earnings to be flat in '07--and there are several that do--I can just tell them they are wrong. They haven't understood our business model:' Hannover Re is scheduled to report 2006 earnings on March 14.

In 2005, Hannover Re booked gross written premiums of around 9.7 billion [euro]. For the nine months to Sept. 30, the company reported gross written premiums of 7.65 billion [euro].

Shifting Capital

Benfield said that new entrants are still keen to join the market. In its report, the broker said "new capital from a variety of nontraditional sources continued to flow into the reinsurance sector during 2006, with inflows of some $8 billion attracted via catastrophe bonds and sidecars.

"This still represents a relatively small amount of total reinsurance capacity, Benfield said, "but the pace of innovation suggests the potential for change for the longer term reinsurance cycle."

In particular, Benfield points to the introduction of catastrophe loans in reinsurance, saying that since hurricanes like Ivan, Katrina, Rita and Wilma, the imbalance of supply and demand for catastrophe reinsurance has led brokers, banks, rating agencies and investors to look hard at alternative sources of reinsurance capital.

Catastrophe bonds have both plus and minus points, according to Benfield. On the one hand, they are attractive because they are collateralized against default, which limits counterparty credit risk, and they provide multiyear cover, while multiyear treaties are less common.

On the negative side, cat bonds are affected by event risk, which is particularly applicable to single-event, single-loss covers which tend not to reflect the assumed risk portfolio covering two or more losses; basis risk, which is the danger that the trigger for the bond might not match up with the actual loss; and tail risk, the danger that losses might turn up after the bond has matured.

Key Points

Evidence from January renewals shows rate softening in all lines except U.S. property catastrophe.

* Brokers anticipate a stable 2007 reinsurance market, though rate pressure is expected to continue.

* Reinsurers are seeing cedants retaining more of their risk and turning increasingly to securitizations and other capital resources.

Reinsurance Renewals: The Early Returns

Preliminary observations of Jan. 1 renewals patterns by broker Benfield Group show that pricing trends remain firm for U.S. property catastrophe risks. Other nonlife lines generally show steady to declining rates.

U.S. property catastrophe pricing trends by region: Nationwide, trends are up 30% to 50%.

* Northeast: 25% to 40% * Southeast/Gulf: 41, 25% to 45%

* Midwest: flat to 10% rise * Northwest: flat to 5% rise

By line of business:

* U.S. Casualty: Cautiously softening

* U.S. Workers' Comp: 7% in 2006.

* U.S. Surety: Softened considerably

* U.S. Terrorism: Pricing trends mixed.

* U.S. Med Mal: Softened in 2006.

* U.S. Lawyers' Professional Liability: Stable.

* U.S. Directors & Officers: Generally stable. * Canada: All lines generally stable.

European property catastrophe pricing trends: Romania and Austria up. Elsewhere from flat to down by 15%, with parts of Italy down by 30%.

* Austria, Germany and Switzerland: Accident down by 5% to 10%; general liability and credit down 5%; motor liability up more than 10%.

* Belgium and Luxembourg: Catastrophe reinsurance down as much as 10%.

* Netherlands: Property risk down about 10%; property catastrophe varied between flat and down by 10%; motor rates stable.

* France: Property per risk down 5%; terrorism down 5%; property catastrophe down 5% to 10%; motor liability up 20% to 30%.

* Italy: Weighted market average for catastrophe pricing down 20%.

* Spain: Marine, property, motor third-party liability and personal accident all down by 5% to 10%; general third-party liability excess of loss down 2% to 3%.

* Portugal: Property catastrophe excess of loss stable; motor third-party liability excess of loss up 20%.

* United Kingdom: Property catastrophe down 2%.

* Central/Eastern Europe: Property catastrophe down 10% to 20%.

Source: Benfield Group

Munich Re Renewal Premium Drops 3%.

Stressing its determination to adhere to "risk-adequate" prices and conditions, German reinsurer Munich Re Group said it renewed about two-thirds of its property/casualty treaty book, with a total premium value of some 9 billion [euro] (about $11.6 billion).

The total is likely to be about 300 million [euro], or 3%, less than the figure for Jan. 1,2006, Munich Re said.

"We are satisfied with the outcome of renewals at 1 January," Torsten Jeworrek, a member of Munich Re's board, said in a statement. 'All in all, the price level is attractive and commensurate with the risks."

Jeworrek noted an increasingly competitive atmosphere in the reinsurance sector. "For the market, this was not a renewal for profitable growth," he said.

Munich Re expects competition to be a factor in subsequent renewals this year. But stressing the need for a disciplined view of the market, Jeworrek described the recent Winter Storm Kyrill as "a clear demonstration of the growing threat of the natural hazards risk and rising loss potentials:

Munich Re lowered, or even eliminated, its exposures in some less attractive lines and territories. It pulled back from the automotive business in France and Germany and from the international aviation sector. Munich Re also walked away from some business in China, a market it described as "highly competitive"

The reinsurer said it wrote "some 850 million [euro] of new business with good profit potential"

Non-proportional business accounts for 23% of this year's business, up from 21% in 2006. Property makes up 42% of the book, compared with 38% last year. The property account is "relatively short-tailed," Munich Re said. Casualty dropped to 41% of the total, from 44% last year.

"This portfolio mix reflects current market I conditions" Jeworrek said.

Munich Re reported solid increases in premiums for hurricane exposures in the United States, even as it noted the low level of hurricanes in the United States in 2006. The reinsurer also pointed to welcome increases for agricultural risks.

Price increases in retrocessional cover were encouraged by a tightness in international capacity, Munich Re said. In i light of its established risk management strategy, Munich Re reduced its retrocessional spending.

--Robert O'Connor

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Swiss Re Group A.M. Best Company # 85010 Distribution: Brokers

PartnerRe Group A.M. Best Company # 86411 Distribution: Brokers

Hannover Re A.M. Best Company # 85070 Distribution: Brokers

Munich Re A.M Best Company # 00149 (Munich Reinsurance America) Distribution: Brokers, direct

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