Overview

The reinsurance market showed a fair amount of stress at the beginning of 2009, following a high level of large loss activity and the financial market downturn in 2008. There were several large losses in the market, including Hurricane Ike, which we estimate as one of the three largest losses to the market ever. Reinsurers also sustained losses on their asset portfolios and in bond guarantee and related insurance operations. As with all other financial institutions, reinsurers
were concerned about their ability to raise fresh capital, and this further reduced their risk tolerances.

The stress increased the cost of reinsurers’ capital and raised prices. This trend was apparent at January 1, increased for second quarter renewals, and then began to subside by July 1. By late 2009, much of the pressures had eased. Catastrophe experience has been benign this year to the worldwide market, with no individual event costing reinsurers over $1 billion. Equity and currency markets have recovered about half of their 2008 and early 2009 losses, and the credit market has
reopened for financial institutions. Many reinsurers’ stock prices have recovered much of the steep losses they had sustained last winter. Most have far more capital than a year ago.

By year-end, prices have now softened from mid-year levels. Capacity is abundant. While reinsurers are maintaining their technical discipline, most ceding companies are able to place improved terms.

However, falling business production and rising expense ratios are concerns for both insurers and reinsurers. The currently depressed levels of employment and economic activity are producing flat or declining exposure bases. Market premium volumes continue to shrink, both due to reduced exposures, and increased levels of price competition among insurers. To manage excess capital, we expect many reinsurers to buy back shares, merge or do both during 2010.


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