Dear Friend,

A lot of direct writers are in a bit of a squeeze between the proverbial rock and a hard place.

I’m going to play you two quotes — and you won’t believe they come from the same source (in fact they are only lines apart in a 1st-half results announcement).

Here’s the rock of a soft market grinding away at the prospects for profitable growth:

“The absence of any significant claims activity in the early part of 2006 and the benign start to the hurricane season have already contributed to a market wide sense of complacency that, regrettably, shows signs of converting to a lack of rating discipline and excess capacity across the board. Certainly there are areas of business which are already subject to weakening.”

And here’s the hard place:

“The areas of business which were subject to substantial losses in 2004 and 2005, US catastrophe-exposed property business, both direct and reinsurance, and Gulf of Mexico energy risks, are subject to unprecedented rating increases.

“Reinsurance cover for these risks is, as we predicted, not available at an affordable price and certainly this has raised interesting issues about the dynamic between premium, exposure assumed and reinsurance cost and about our risk appetite. This has led to our decision for 2006 to underwrite our US catastrophe-exposed book without the benefit of reinsurance. We are, however, now underwriting the business in such a way as to reduce our exposure to a repeat of the losses experienced in 2004 and 2005.”

This is clearly not a very pleasant place to be — you’re forced to write net in the best-priced segment just when you want to be gearing up to write a lot more, whilst you need diversity or your risk profile is going get completely lopsided.

(I mean, not that many people want to buy the shares of a 100% net US Gulf coast Cat writer — and if they did, they’d probably do it by backing a sidecar or a start-up themselves).

So where does one go for relief in diversity? Aviation is soft as hell, with a raft of new start-ups not helping one bit. Marine is tough too. There is a bit of decent international and other specialist non-marine business to be had — so for the time being you go after that.

The company in question here is Hardy Underwriting at Lloyd’s. Hardy is a well-run and well-respected outfit, with an enviable track record. It has come through plenty of difficult markets and catastrophes and has always lived to fight another day.

And it is doing all the right things this time too.

But this candid and commendably honest assessment of today’s market tells us loud and clear:

“The party’s nearly over — time for prudent underwriters to be on their mettle, and preferably standing near the door — this could get ugly.”