NU Online News Service, Dec. 16, 3:11 p.m. EST

Moody's Investors Service said it is maintaining a cautious view on the reinsurance sector as it expects profitability to be pressured by continued deterioration in pricing, diminishing impact of reserve releases and low investment yields.

Reinsurers are operating in "an increasingly challenging environment," according to Moody's, "exemplified by anemic demand, softening prices and some loosening of terms and conditions."

The rating agency said, "Our credit view on the sector remains cautious, as we believe the macro fundamentals of excess capacity and slack demand will eventually show up on the bottom line."

Firms still have generally strong financial fundamentals, Moody's said, helped by prior-year reserve releases. Moody's also noted that reinsurers will benefit from the lack of losses during this year's hurricane season.

"However," Moody's said, "we note that favorable loss reserve development continues to mask the weakness in accident-year underwriting results."

Moody's said it expects calendar-year combined ratios to trend higher as reserve redundancies shrink, and the rating agency pointed to a number of 100-plus accident year combined ratios reported by firms for the first nine months of the year.

Modest to negative premium growth is expected going forward, Moody's said, and has already occurred over the first nine months of 2010, with 28 reviewed firms reporting a 2.2 percent decrease in net premium earned. Firms showing any substantial growth, Moody's said, would raise questions, Moody's said, such as what market segment the growth is occurring in, and the firm's mix of longer and shorter tail lines.

While diversification could help firms manage the challenging conditions in a given market, Moody's said, "Firms that are diversifying have to overcome both their lack of familiarity with the market and competition" from existing players. Moody's said it would question how a firm gained comfort and expertise in these new risks, the underlying dynamics of the sector into which the firm is expanding, and the firm's strategy to gain a competitive advantage and differentiate itself.

Moody's also said it would be keeping an eye on stock buybacks. While such buybacks could alleviate some pressure to redeploy capital in the challenging market, Moody's said buybacks in excess of earnings could leave a firm more exposed to large adverse developments.

Despite the challenges in the marketplace, Moody's said reinsurers "have remained generally disciplined and risk averse," and have reduced exposure in some of the least attractive lines of business. This, too, could be a double-edged sword. "In fact, the present discipline may help extend the duration of soft market conditions in the sector, further delaying the recovery in pricing," Moody's said.

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Moody&#039;s: Market Pressures Drive Cautious Reinsurance Outlook

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