(Bloomberg) -- It won’t take another Hurricane Katrina for reinsurers to face lossesfrom covering the cost of storms and earthquakes. Competitors suchas hedge funds have eroded prices so much that a typical year ofclaims could move the industry into losses.

Property & casualty reinsurance is “getting very close tocombined ratios of 100 percent,” Manfred Seitz, managing director of internationalreinsurance at Warren Buffett’s BerkshireHathaway Inc., said at a roundtable of industry executives onMonday. “Even if we see normal catastrophe claims in 2016, youcould see a number of companies” reach the threshold. A ratio above100 percent means claims and expenses exceed premium income.

Prices for reinsurance, which primary insurers buy to help themshoulder risks, have fallen in eight of the past 10 years,according to a property-catastrophe index compiled by GuyCarpenter. The industry has been releasing reserves for pastclaims, which has helped cushion against both the impact of theprice declines and falling investment income from ultra-lowyields.

“What we’ve experienced is kind of the opposite of a perfectstorm,” Matthias Weber, chief underwriting officer atZurich-based Swiss Re, said, referring to the industry in general.“Everybody enjoyed reserve releases. However, if we adjust resultsfor this and the ‘good luck’ due to the absence of large naturalcatastrophe losses, they are not that fantastic anymore.”

The combined ratio for property and casualty at Swiss ReAG, the world’s biggest reinsurer, worsened to 101 percent inthe second quarter from 92.9 percent a year ago after catastropheclaims including earthquakes in Japan and wildfires in Canada. It would have been5.5 percentage points higher without prior-year releases. MunichRe’s ratio in the same segment rose to 99.8 percent from 93.3percent, even after releases improved the measure by 5.1 percentagepoints.

‘Underlying deterioration’

“If you look at the combined ratios before reserve releases, thenyou can clearly see an impact every year from the softening in themarket,” Ludger Arnoldussen, a Munich Re management board member, said at theroundtable organized by Bloomberg News. “The underlyingdeterioration is there.”

The ratios are rising despite losses from natural disasters forthe first six months of the year only being in line with the10-year average, according to Munich Re estimates. Reinsurersare also running out of claims reserves that they can release asprofits fall, Allianz Re ChiefExecutive Officer Amer Ahmed said in February.

Competition is rising as central banks’ quantitative easingprograms pushed down yields for traditional investments, luring newparticipants to the market. Investors from hedge funds to pensionmanagers hope to boost their returns by putting up capital to backrisks through insurance-linked securities such as catastrophebonds.

Alternative capacity from capital-market offerings such ascatastrophe bonds and collateralized reinsurance rose to a record$73 billion in the first quarter, according to Aon Plc. Reinsurershad a further $580 billion available to back risk in the firstquarter, matching the high reached a year earlier, the brokersaid.

Price falls

That meant continued price falls when contracts were renewed inJuly, albeit at a slower pace than previously, both Munich Re andSwiss Re said when reporting figures for the second quarter. MunichRe saw a 0.4 percent decline in prices in July compared with a 2.1percent drop a year ago, the firm said.

“We clearly have a situation of oversupply,” said Juan Beer, whobuys coverage as head of group reinsurance at Zurich InsuranceGroup AG. “It takes a lot to reverse the cycle such as afinancial-market shock or a massive natural catastrophe.”

The industry is gathering in Monte Carlo next month for itsannual meeting to discuss prices for next year with customers.Negotiations there will be more difficult than in the last twoyears and rates are unlikely to fall materially in 2017, said DirkLohmann, chief executive officer at Secquaero Advisors AG whichadvises reinsurers on risk management.

Markets are already punishing the industry for the rising ratiosand falling profits. Swiss Re, Munich Re and HannoverRe, three of the world’s four biggest reinsurers, reported adecline in quarterly earnings in the second quarter. Munich Reshares have fallen 13 percent this year, with Swiss Re down 17percent and Hannover Re losing 14 percent.

“On the surface, reinsurer results may still look good, but ifyou look at the underlying health they don’t,” Ahmed at Allianz Re,the reinsurance arm of Europe’s biggest insurer Allianz SE, said onMonday. “The benign catastrophe environment of the last few yearsled to good results.”

Hurricane season

The favorable level of claims in recent years may be threatened bythe U.S. hurricane season. The Atlantic basin willsee the most named storms since the 2012 season, the year Sandycaused as much as $50 billion in property damage in the U.S., withas many as four of those strengthening into major hurricanes byNov. 30, the National Oceanic and Atmospheric Administration saidAug. 11.

“Analysts and investors absolutely know that good luck will notbe the new normal” when it comes to claims, Swiss Re’s Weber said.“It is just a matter of time until the big hammer comes down andthen, resilience, size and capital on the balance sheet will makethe difference.”

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