Despite huge losses from catastrophes last year reinsurers began2012 in solid shape, but the companies benefited from factors thatmight not be present going forward—and the industry will requirerenewed focus on underwriting, ratings agencies say.

Moody's Investors Service notes that in years when thereinsurance market has suffered considerable losses, it has shownthe capacity to rebuild capital faster than other financialinstitutions. As an example, Moody's points out that reinsurersbegan 2012 with more capital than they had at the start of2011.

For the future, however, ratings agency A.M. Best says that“underwriting is likely to remain the most critical component ofearnings” for reinsurers.

In 2011, the top 50 global reinsurers produced an underwritingloss for the year but still managed to make a small profit througha combination of net investment income and modest capital gains,A.M. Best notes.

That performance was not spread evenly across the board, Bestsays, observing that European reinsurers have a broader capitalbase and diversification in business. Bermuda insurers, bycontrast, are primarily invested in the P&C market and aresubject to “a larger share of shock losses.”

The industry also benefited from reserve releases built upduring the hard market of 2002-2006, says Best.

“Expectation is building that this degree of favorable reservedevelopment will not hold up,” the ratings agency warns, addingthat “pressure will increase on underwriting margins to generateearnings as long as investment yields remain lackluster.”

Moody's notes that reinsurers learned valuable lessons from 2011and are tightening up underwriting and instituting betterrisk-management safeguards. However, hardening in some lines maytrail off in 2013 due to ample capacity.

“A large disaster, faltering primary rates or worsening of theglobal economy could still derail our view,” says Moody's.

Both A.M. Best and Moody's rate the reinsurance industry asstable. “The stable outlook acknowledges the industry's resilience,improvements in underwriting and risk management, a possible pickupin demand due to impending regulations and hardening in someprimary insurance markets,” says Moody's.

A.M. Best says the segment “is being held stable, supported bycontinued strong risk-adjusted capitalization, prudent enterpriserisk management and an improving pricing environment across abroadening spectrum of business classes.”