Baden Baden is a sleepy little town.

Baden Baden is a sleepy little town. Nestled in the heart of the Black Forest it offers a tranquil and cosy setting for doing business. This year, close to 2,000 reinsurance buyers, sellers and brokers descended on the town, clogging up its hotel lobbies and staying up much later than the average spa town tourist.

Each night, they could be seen tucking into the very best comfort food Germany has to offer before heading down to the popular Leos bar for a few nightcaps. Slabs of roast pork, potato dumplings, delicious, meaty gravy and wheat beer are a far cry from the delicate canapés and champagne served up in Monte Carlo. The food, it seems, is a good barometer for the key difference between these two famous reinsurance gatherings. The Rendez-Vous de Septembre in Monte Carlo is more sophisticated and senior-level while Baden Baden is all about hard graft. And grafters need sustenance.

The six weeks between both events makes all the difference. The sunglasses and polo shirts of Casino Square are replaced with suits, coats and scarves. The sun sits lower in the sky and many Europeans are wondering if they enjoyed a summer at all this year. A slip in reinsurance rates is now looking inevitable and comfort food is back on the menu.

Those buyers hoping to see rates plummet significantly are likely to be disappointed. Markel managing director Peter Middleton expects prices to hold up around the European storm zone and it is unlikely that US catastrophe-exposed lines will soften perceptibly. Sharon Gallagher, treaty reinsurance underwriter at Kiln expects prices to stay fairly stable. “No one expects them to go up.”

With this year’s Atlantic hurricane season now all but over reinsurance executives are daring to hope for another profitable year. It’s tempting to think of 2007 as having had benign catastrophe activity – but that’s not true. If anything, 2007 has been a year of near misses and “non-peak” losses. Had either of the two catastrophe 5 hurricanes in the Atlantic this summer taken a different path, balance sheets would look very different. As China’s insured values grow, so too should concern about the heightened typhoon intensity and severity witnessed this year.

“A slip in reinsurance rates is now looking inevitable and comfort food is back on the menu

The fact is, reinsurers were extremely lucky to escape this year’s wildfires, floods, cyclones and earthquakes relatively unscathed. Those expecting their luck to hold out really don’t understand the business. This year’s catastrophes may not have been enough to change the general direction of the market, but they should serve as a warning.

Liquidity crunch

Subprime exposures have become clearer as the third quarter results have trickled in. For the most part, the impact has been isolated. Rating agency analysts continue to reassure that most insurers and reinsurers will escape the “credit crunch” unscathed (see our “GR debate” on page 20). “They seem to have diversified their portfolios well and are at a point where even if there are losses greater than some people are predicting, those insurers that have subprime exposure could weather the storm well as a group,” says Keith Buckley, group managing director and global head of insurance at Fitch.

If anything, problems in the credit markets could sort out overcapacity in the Bermuda market, predicts Middleton. “It would be nice for the rest of us to think that subprime could have an impact on Bermuda,” he said. “The people investing in Bermuda start-ups might want a bit of their money back. That’s not a bad thing.”

Whether M&A activity will happen on the island is uncertain. So far this year most Bermuda companies have preferred to buy up Lloyd’s syndicates or US surplus lines insurers in a bid to diversify into new lines of business and new markets. Consolidation remains likely in the coming months, particularly if reinsurers continue to generate handsome profits in 2007. Should another ACE or XL be waiting in the wings, now is a good time to emerge.