Dear Friend,

Isn't the market in good shape right now? The dislocation caused by the unprecedented Cat losses of last year is slowly but surely being put back into its place

Now that US coastal Cat prices have been readjusted risk appetite is returning — just look at the second quarter statements of Berkshire Hathaway and recent comments from Partner Re and Renaissance Re for a clue.

Earlier in the year Buffett had been a little ambiguous about whether he fancied a piece of the action — but with the latest numbers we now know he was just holding out for slightly better pricing!

At these prices, US cat business is a great write — the only problem has been an inability to bolt enough capacity together, or often more likely an unwillingness to be seen to be doing business in the geographical region that has just given everyone the biggest loss in history — pure risk aversion.

Another pleasing feature is that on a net basis, KRW reserve levels seem to be stabilising and maturing — overall there were as many reserve releases as there were additions in the second quarter numbers — most were stable.

I feel it's now odds on that the biggest skeletons have already come crashing out of the closet.

I remember I was in Bermuda in February when the shock PXRE reserve increases stunned the market. Perhaps what was most amazing was how calmly and quickly clients and brokers absorbed the news, digested its consequences and moved on.

And move on they have — instant cancellation and replacement has been the order of the day. PXRE has now lost 82% of business in force at 1/1. It's tough, but this is how a healthy market works.

The "slow-motion disaster" theorists have had their day — the slow-motion has slowed to what is almost a freeze-frame.

This market is being driven by, risk perception and the balance between that perceived risk and the reward that is available. It is not being driven by across the board rate hikes from reinsurers who desperately need to rebuild their balance sheets.

One great anecdote I gleaned from reports on the Florida renewals was that even in the US State where the crunch has been hardest, inability to place business has been down to unwillingness for the cedent to pay the new higher price rather than a pure lack of capacity.

Presumably because it is such a painful business for Florida insurers to pass increased costs of reinsurance on to their end eventual customers.

My prediction is for more capacity to be allocated away from softening global casualty and life markets and pumped back to where it is really needed in the property and energy spheres — ie gradual global softening, or stabilisation, rather than global hardening.

You really can't buck the cycle for long.