They had heard some good news. On Sunday the news had come over their Blackberries that the US government was taking over troubled mortgage lenders Freddie Mac and Fannie Mae and that share prices were picking up. Insurers and reinsurers have a big exposure to Freddie and Fannie so the news went down very well indeed on the terraces of the Monte Carlo Rendez-Vous.

Insurance CEOs – like everyone else – hope that what stands to be the largest bail-out in US history will prop up the country’s plunging housing market and ultimately stop the credit crunch going out of control.

President Bush said the two firms had posed “an unacceptable risk” to the economy: between them Freddie Mac and Fannie Mae finance or guarantee nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.

“Of course we knew they would get on to it eventually – they had no choice,” one reinsurer told me. “But how nice to hear the news here.”

The rescue could cost the Federal government $200bn as it injects fresh capital into the limping mortgage giants to keep them solvent.

That’s one less thing to worry about then. But as reinsurers keep reminding one another here, we are in a softening market at a time of stock market troubles and an overall deteriorating environment. Add to that the spectre of nat cats (anyone got the latest on Ike?).

Without Ike, insured losses up to September 1 2008 increased by 20% compared to the same period in 2007. So, CEOs keep telling us, we are seeing an uptick in nat cat losses against a background of meagre investment returns thanks to low interest rates. It is not like the late Nineties. Your investment portfolio won’t compensate for claims costs. Get used to it.

But don’t stay too focussed on nat cats and property business. Delegates here keep returning to their fears for the liability lines of business and the background to that is inflation. Increasing medical and social costs especially, spell trouble for all. We’re sort of used to it in the US but according to Jacques Aigrain, CEO of Swiss Re, Europe is experiencing an acceleration in long tail line claims costs.

Like his peers, Aigrain espouses underwriting discipline (a phrase you hear a lot in Monte Carlo). The Swiss Re boss impressed everyone with his repeated claim that they will leave money on the table rather than write business that stresses their margins. At the halfway point, Swiss Re has cut or replaced 21% of its total traditional portfolio, he said.

“That’s good,” said one investment analyst, “But if this market persists, you won’t have any business left.” But Aigrain had an answer for that saying that reinsurers should be preparing for the hard market – and you don’t do that by writing too much in the soft cycle.

Moody’s analysts think that the underwriting cycle will ultimately determine the fundamental credit condition of the market. And the picture there isn’t good, it believes as pricing continues to decline steadily in both property and casualty lines of business. Moody’s senior analyst Pano Karambelas says that while the industry has not yet breached the technical level, buyers are beginning to explore lower levels of retention for liability business which is a bad sign.

AM Best Co takes a similar view in its outlook report, sub headed “Profits Under Pressure”. It says that the market rode two years of solid earnings into 2008 (although 2008 isn’t over yet in terms of catastrophe activity) and that the industry’s capitalisation is healthier than ever. But it points out that loss from earlier soft market years are a lingering drag on some companies. With property and casualty rates softening again, current reserving isn’t likely to be sustainable or reliable for boosting earnings in future years, it warns.

Moody’s says that the market is subject to the vagaries of economic conditions in “multiple geographic zones” and faces the prospect of incremental volatility from several economic perils – notably the squeeze in the credit market and also the impact of inflation on underwriting margins. Inflation is important in long tail business but also on property business where prices for commodities and therefore building materials are soaring. It adds that this effect is not captured by cat models, but my guess is that some modelers may dispute that.

AM Best says that the weakening global economy and the turmoil in the equity and capital markets have added to the pressure on reinsurers. Not only are they watching their expenses but as the equity and credit markets falter, investment income also comes under pressure, providing less margin for error on the underwriting side.

Most of the talk in the hotel lobbies and bars of Monte Carlo is to do with rates and what will happen at the forthcoming renewals. AM Best says that renewal rates at July 1 showed a continued, steady descent best described as a controlled glide not a crash landing. So far, it seems like reinsurers are standing their ground in the face of intense pressure from cedants, it says.

In Monte Carlo this week, reinsurers will continue to talk the talk. But they will all be wondering how long they can continue to walk the walk.

NOTE: An unusual addition to this year’s Rendez-Vous is the presence of hundreds of super fit athletes here. An event known as the Ironman took place on Sunday morning. It involved a swim in the sea, a long bike ride in the mountains followed by a half marathon run – a total of over 70 grueling miles in fierce heat. But at least it is all over for them by Sunday midday. The iron men and iron women of the reinsurance world have got another two days of grueling meetings and cocktail parties to go.

Today, it is an intense four day whirl of meetings, press conferences and cocktail parties that attract senior reinsurance industry executives from all over the world.

In 2001, afternoon meetings were in full swing on 11 September when news began to filter through of catastrophe in Manhattan. For once a hush fell over the Rendez-vous as executives tried to comprehend what was happening in the Twin Towers. Many of those present had friends and colleagues in the buildings.

There is usually plenty to talk about. Often it is hurricanes. In 2005, Hurricane Katrina had just completed its devastating tour of the Gulf coast, and the extent of the flooding in New Orleans was just becoming clear as reinsurance people poured into Monte Carlo to discuss risk pricing.
Usually it is an upbeat affair. As Cannes is to the movie business, Monte Carlo is to the risk business. If you are big in reinsurance, you simply have to be there.
Why Monte Carlo? There are very few places that have so many big hotels crammed together and of the high standard demanded by CEOs, not to mention Michelin-starred restaurants. Also, it is safe. Monaco has more policemen per head than any other country, so no-one has to worry about getting mugged on the short walk between hotels.
The atmosphere during the RVS is not as charged as during the Grand Prix week – but Monte Carlo is still a mad house for the duration of the reinsurance meeting. People start to arrive on Sunday; the lucky ones by helicopter shuttled from Nice airport. Financial journalists pile into press conferences called in hotel salons across town while business people hook up for snatched conversations in hotel lobbies and café bars close to the casino in the centre.
The hub of the RVS from morning until dusk is the Place du Casino. The terrace of the Café de Paris, on one side, is mobbed by reinsurance people desperately trying to find their next meeting in the crush. Push your way through the parked Ferraris to the other side of the Place, up the steps, through the revolving doors and into the magnificent lobby of the exclusive Hotel de Paris where the air is buzzing with industry gossip.
A short walk away, the belle époque salons of the Hotel Hermitage are where more subdued, discrete meetings take place. For those who like a sea view, the vast Piano Bar of the rather more garish Fairmont-Grand Hotel is the place to find a berth.
Starting with an early morning power breakfast, people make absurd demands on their diaries and their constitution: a series of 15 minute meetings back-to-back means there’s no margin for error. Spend too long on pleasantries with that London broker and your schedule is thrown. One more coffee with that Bermuda underwriter and you’ve got caffeine poisoning.
Forewarned is forearmed: be prepared with these Rendez-vous survival tips:

• Men need to pack the smart/casual uniform of chinos and polo shirts. Women will need posh frocks for cocktails and dinner
• Bags a table early in the Café de Paris and keep it all day. But remember to top up the meter, I mean waiter
• Keep your Blackberry charged. People’s plans change and you will need something to do while you wait for no-shows
• Don’t stare at the ‘ladies’ wearing mink coats in the Hotel de Paris even though the temperature outside is 27 deg C
• Do wear a fur coat if most of your meetings are in the aptly named Sporting D’Hiver. The aircon is set at minus 10 deg C
• Pace yourself on Tuesday as the last cocktail party starts at midnight on the terrace of the Hotel Hermitage
• Good places to hide if it all gets too much include Monaco’s Old Town, the Jardin Exotique or Jacques Cousteau’s Oceanographic Museum
• If you can’t be there in person have a virtual Rendez-vous: pay to register and get your name in ‘the book’ anyway. Give your hotel as ‘residence privee’

Keep following the blog as I’ll be posting more entries from Monte Carlo itself. And Lloyd’s will be launching a new report on coastal flooding as part of their 360 thought Leadership program.