Dear Friend,

Almost exactly seven years ago to the day I was enjoying the tail-end of my honeymoon on the Yucatan peninsula of Mexico.

Yes, I know you’re wondering why a reinsurance broker should be fool enough to go on holiday in the Caribbean during the hurricane season, but it was extremely good value and we had spent all our money on the wedding, so we thought we’d take a chance on the cheapest exotic location we could afford.

We flew into Cancun and deliberately avoiding its 20-kilometre strip of gaudy hotel complexes, immediately took the ferry to a charming island opposite called Isla Mujeres. Needless to say we had a great holiday travelling around the Yucatan — there are lots of amazing Mayan ruins to see – and the people are extremely friendly — especially once you get away from the slightly over-developed coast.

And that development has been utterly spectacular — it is incredible to think that as recently as the 1960s the territory of Quintana Roo was a long strip of virgin coastline with a vast almost uninhabited area of jungle, famous only as a refuge for fugitives from justice and bandits. The territory was only made a full state of the Mexican Federal Republic in 1974!

Thirty years later and the peninsula is criss-crossed by six-lane highways and the strip of hotels in Cancun would not look out of place on Spain’s Costa del Sol. Millions of visitors flock there every year from all over the world. If any illustration were needed of the exponential growth in insured values, then this is it.

On the last day of our holiday a waiter that we had befriended with showed us the front page of the local paper — it was taken up almost entirely by a satellite image of an enormous swirling tropical depression. A couple of days later that depression strengthened into Hurricane Mitch and devastated large areas of neighbouring Honduras, Guatemala and Nicaragua.

Cancun escaped Mitch — but seven years later Wilma is going to be a direct category five hit. The coastal damage will be considerable — and goodness knows how many more hotels have gone up since I was there.

But there is one other tourist attraction I haven’t mentioned that might mitigate damage in the region —its geology. The peninsula lies in incredibly porous rock which means all the rivers run underground, forming spectacular cave formations called “cenotes”. Because of this vast underground reservoir, the chances of the sort of flash flooding that would devastate villages in other areas must be extremely slim.

Still, that must be small comfort as the hatches are battened down and the storm approaches

Dear Friend,

Well, I must say now that the renewal season proper is finally kicking off, it’s quite a relief.

First we had the “phoney war” period around Monte Carlo , where preliminary Katrina damage estimates were coming out, but nothing much was happening.

Now many of those initial estimates have more than doubled and mega-cash and 2006 targets have been raised by the most nimble, it’s time to go out and earn that extra premium.

The only trouble is that now is the crunch. A lot of that capital has been raised on the grounds that a 2006 reinsurance dollar has got a great chance of earning a bumper return.

But as you know I just don’t see rate rises across the board.

Gulf of Mexico – yes of course you’ll get your rate hikes — but since all the models have been proved inaccurate you are effectively underwriting blind. And I still don’t see you getting much in areas that haven’t had losses and whose technical rating is still more than adequate.

So are you ready to “suck it and see” in the danger zone one more time? How lucky are you feeling?

Surely the only available underwriting tool left functioning — the seat of your pants — is telling you that it’s almost a statistical certainty that the Gulf Coast is going to get at least one Category 4+ landfall next year?

It’s decision time — are a few extra dollars going to swing it? Next year’s hurricane season is either going to make you look like a genius or a dunce. Unfortunately this time the decision is 100% yours.

Good luck, I really don’t envy you.

Dear Friend,

What a week! It seems we had all been deluding ourselves that we’d had all the news we were going to have from Katrina and that things might settle down for a while. But it just turned that it was the relative calm of the eye of the hurricane passing over us — and this week we got the full blast again.

On Monday and Tuesday I was starting to wonder why it seemed that everyone was raising capital when up to that date everyone had been swearing blind that Katrina was not a capital issue, but merely a hit to the 2005 profit and loss account.

When ACE said it wanted its new cash for exploiting new opportunities I was thinking “hang on a minute — WHAT opportunities exactly? Everyone’s been saying that there’s still too much capital sloshing around, so what do you need more for?”

But today I know why — Katrina is going to be a lot worse than we all feared and quite apart from balance sheet repair, it looks increasingly like the powers that be in the ratings world are going to require everyone to carry more capital for doing the same job as before. It’s a stitch in time to make sure the rating can stand up into the renewal season.

First a look at quantum — the only way is up for damage estimates. All the news is of increases and plenty of estimates have more than doubled from that great rash of early statements around the time of Monte Carlo. What’s more, Aspen gave us a peek at the state of its retro protections — and it’s not pretty.

And some markets are losing their nerve— we’ve had one temporary withdrawal from business pending a review and one reinsurer looking for such a significant capital injection that it may mean a possible outright sale. To my mind there is no such thing as a temporary withdrawal a line of business at this time of year — you’re either quoting renewals or you’re not. And if you’re not quoting or committing to renewals through November, your brokers and customers are unlikely to let you back into the game at some future date, even if you eventually decide you want back in.

What’s more there are plenty of indications that the rating model for the Gulf of Mexico has been thrown out of the window by reinsurers and their raters alike.

This has been the dialogue:

Bang! – “losses are worse than we thought”. Wham! “Possible downgrade” – Bang! “Capital raising” – Wham! “We still might downgrade you anyway!”

Thank goodness that Wall Street is ready willing and able to fund all of this.

So I’ll see you down at Goldman Sachs, Citigroup, Lehman Brothers etc. And here’s a sobering thought — if enough of us go, there’s still time to nip this possible hard market in the bud!