Dear Friend,

The news just keeps coming — just trying to keep up with the sheer volume of it all and making sure that we’re reporting everything accurately means I’ve hardly had time to think what I’m going to write to you today.

But one thing in particular stood out from the flurry of capital raisings, takeovers and start-ups. In amongst the bundle of optimistic, forward looking statements came a very important warning from Partner Re’s 2006 outlook.

Read what Patrick Thiele, Partner’s CEO has to say (and weep):

“The reinsurance market remains competitive with substantial price increases only in those lines that were directly affected by the numerous catastrophes of 2005.”

So, there is more than one “pot” after all… but hang on, it gets a lot worse:

“Certain lines and markets that were not affected by those major catastrophes, including Asia , portions of Europe and selected specialty lines, are increasingly competitive”

So, the soft market continues in many lines and territories…

“In addition, many cedants continue to increase their net retentions and are moving from quota share to excess of loss coverages, reducing the amount of premium in the reinsurance marketplace.”

...and demand is at best static or more likely falling – so no get-out clause there.

Why should we doubt Mr Thiele’s sincerity? After all he has built a highly successful global diversified reinsurer from scratch and his only interest should be in talking the market up along with everyone else.

As you, long-suffering reader, are no doubt aware by now, I don’t buy into the theory that single events can change market cycles. Reinsurance is certainly a business that doesn’t correlate with other financial markets, but it cannot exist in a pristine vacuum, wholly isolated from the wider financial world.

And right now the world is awash with money and this is showing up in asset inflation across the developed world. Be it housing, stocks, bonds or commodities, prices are up, up, up and risk premiums are at historical lows.

So if the pricing of risk in the pure financial world is near rock-bottom, why should the price of pure risks such as catastrophe reinsurance be allowed to run at a premium for long?

No wonder investors will jump on anything that looks like it has a good chance of making a decent return. We’ve got twelve start-ups and counting — we wish them all good luck — but this time we suspect that they are really going to need it.