A message from Global Reinsurance editor Helen Yates

Ah June. Sunny skies, long days, warm evenings and not a cloud on the horizon. It’s easy to feel a false sense of security in these Halcyon days. Take a quick snapshot of comments from the industry’s mid-year previews and the real forecast suddenly looks quite different.

“Can US and Bermuda reinsurers continue to thrive in less certain times?” asked S&P in its mid-year 2008 report. “Over the medium term, the US reinsurance sector is likely to continue to experience growth stagnation,” it warned, “while Bermuda might not be able to sustain the growth rates of the past six years.”

Most reinsurance companies are still riding the high after two years of record profits and seem oblivious to the dark clouds gathering around them. But the good times – whether the industry is ready to acknowledge it or not – are well and truly over.

The dual impact of the credit crunch and softening reinsurance prices are creating a perfect storm. As the 2008 hurricane season officially gets underway on 1 June, many players will be glad of the excess capital they’ve shored up. The fact is that the easy ride – brought about by the hard market after Katrina and the voracious appetite of capital market investors – is about to become a distant memory. Yesterday’s woes of what to do with all that excess capital are tomorrow’s wet dream.

Rates are expected to fall 15% at the mid-year renewals, according to Guy Carpenter. “The main factors driving the decline in rates at 1 June 2008 renewals period are a competitive reinsurance market and the absence of any major insured losses,” said Kevin Stokes, global head of Guy Carpenter’s Property Specialty Practice.

“Yesterday’s woes of what to do with all that excess capital are tomorrow’s wet dream.

There have been catastrophes aplenty so far in 2008 – but none with insured losses of a magnitude that could reverse the softening tide. The earthquake in Sichuan and cyclone in Burma were a reminder of the vulnerability of many emerging reinsurance markets – potentially tomorrow’s peak zones. But reinsurance losses will be negligible.

There were the usual hail, wind, rain and flooding events in the US. Severe tornadoes – some of the worst since 2005 – caused extensive insured property damage in Atlanta, Little Rock, Virginia and Memphis. In Europe, winter storms again caused damage. Sisters Paula, Emma, Johanna and Kirsten won’t dent earnings significantly. By AIR’s estimation, Emma – the worst – caused insured losses of between €750m and €1.3bn. Far less than 2007’s costly windstorm Kyrill, which led to claims in excess of €4bn.

It will take a loss – or a series of losses – of significant magnitude to dislocate the industry again. But the industry isn’t just contending with softening reinsurance rates and the prospect of another above-average storm season in the North Atlantic (the National Oceanic and Atmospheric Administration is predicting a 60% to 70% chance of two to five major hurricanes of category 3 strength or higher). The as-yet unknown impact from the global credit crunch is also likely to manifest in ways not yet fully anticipated.

What happens, for example, if a series of large hurricanes plough through Florida? Will reinsurers be diversified enough to avoid a major hit? Will they have enough reserves to cover the losses? More importantly, will capital flow back into the industry like it did after Katrina? This has become increasingly uncertain in the current economic climate.

Just like a good boy scout, preparation is key in these tougher times. Woe betide those reinsurers that rely too heavily on their reserve releases. These are already deteriorating, warns AM Best. Firms might be insulated for now, but the story could look very different in a couple of years, warns Afinia CEO Amanda Atkins. The message here is simple. Enjoy the sun but start saving for a rainy day.