Reinsurance prices are now falling for all classes of business. Property catastrophe prices peaked at the mid-year 2006 renewals, while working cover business peaked at January, 2007. Specialty casualty prices had peaked earlier. Per program catastrophe capacity is now at record high levels. This paper reviews two key economic results behind these market movements: catastrophe experience and capital levels.

The United States had a benign catastrophe year. There were no significant insured hurricane or earthquake losses. Although the Greensburg, Kansas tornado and California wildfires were both meaningful events, neither produced a major reinsured loss. In other parts of the world, reinsurers were not quite as lucky. Holborn tracked 15 events in 2007 that caused $20Bn to $25Bn in direct loss in at least 22 countries. The reinsured portion was $3Bn to $5Bn. Worldwide reinsured catastrophe losses are only half of the average level during 1999 – 2006. Catastrophe experience is a key driver of pricing for all classes of reinsurance.

The 2007 Atlantic hurricane season was moderately active overall, somewhat above the long-term average number of storms. The total number of 15 was well above the long-term average of 11. However, the increase may partly be due to better monitoring or earlier warnings. Nevertheless, with two category 5 landfalls, 2007 was not a weak year.

In the reinsurance market, continued favorable catastrophe experience and price levels supported another year of strong earnings. In the context of much larger asset bases and strengthening foreign currencies, the worldwide market capital has been growing rapidly. Leverage ratios are falling sharply and may now be at record lows. This produces increasingly strong reinsurers who are finding it more difficult to meet their growth and profitability targets. They are competing aggressively for business, through both price reductions and increased interest in new classes.

In 2007, some reinsurers aggressively bought back their shares. Many sidecars have been reduced, non-renewed or bought out. Recent acquisitions have been funded with buyers’ cash, rather than stock, which also releases capital from the industry. Nonetheless, Holborn expects that reinsurers’ capital will continue to rise through 2008, barring a record-size catastrophe or some other surprising jump in loss experience. Alternatively, a cash merger between two large reinsurers could reduce total industry capital.

Even with a major loss in 2008, reinsurers’ capital would remain above industry premiums and be much higher than historical norms. Holborn estimates that it would take three losses the size of Katrina for average leverage ratios to again affect reinsurance pricing.

Many insurers, and some reinsurers, will experience losses due to both insured claims on professional liability lines, and to a lesser extent, asset write-downs. The collapse of sub-prime mortgage pools will probably not be a significant factor in industry experience. But credit market turmoil will make industry mergers more difficult to finance externally.

Holborn expects the worldwide reinsurance market to show only moderate growth in 2008, largely driven by continued appreciation of European currencies when measured against the dollar. We expect the market’s capital to continue to grow through 2008, and leverage ratios to continue their fall, leading reinsurers to continue to repurchase their shares and seek new business opportunities.

Section A. Worldwide Catastrophes

Section B. 2007 Hurricane Season Summary

Section C. Recent Capital Movements

Section D. Reinsurance Industry Results

Section E. Current Market Conditions

Section F. Appendices

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