Moody's Puts Negative Stamp On Reinsurance Outlook

The credit outlook on the reinsurance industry remains negative, Moody's Investors Service said in its recent report, "Global Reinsurance Outlook," as fundamentals are expected to weaken in the future.

Moody's said it expects that fundamentals for the sector are more likely to weaken than improve in the next 12 to 18 months. The rating service said the sector will be challenged by soft pricing, overcapacity and low investment yields.

However, this view is already reflected in the ratings and outlooks assigned to individual firms, Moody's noted.

In 2009, reinsurers' book value increased due to the recovery in the capital markets and low catastrophe losses, Moody's said. Balance sheets have remained strong despite much higher losses this year related to events such as the Chilean earthquake and the Deepwater Horizon oil rig disaster.

By the second quarter of this year, book value for the top 40 global reinsurers increased more than 5 percent over the end of last year to approximately $385 billion.

At the same time, however, demand is sluggish, reflecting slow global economic growth, said Moody's.

"With premium volumes drifting lower and equity positions holding steady, we believe the industry has too much capacity, which is likely to manifest in increased price competition going forward," said James Eck, vice president-senior credit officer and the lead author of the report, in a statement.

He went on to say that renewal prices continue to decline for most property and casualty lines, and that the path of least resistance will lead to even lower pricing in the absence of a transformational catastrophic event.

"Though profitability has held up well as a result of favorable fixed-income markets and harvesting of reserve redundancies on older underwriting years, we expect profit margins to be increasingly pressured as rate decreases affect the bottom line, investment income drops due to low yields, and the impact of reserve releases diminishes," Mr. Eck said.

A loosening in terms and conditions and the need to maintain equity capital because of still-fragile market confidence compound the situation.

Too much capacity is not necessarily the same as too much capital, Mr. Eck noted, adding, "While share buybacks have helped keep the level of overcapacity in check, solving the overcapacity issue in this environment may require capital to leave the sector through consolidation."

With equity valuations languishing for nearly two years, some firms may not be able to sufficiently recapitalize after another major catastrophe. Firms that are unable to re-load post-event could breach comfortable operating and financial leverage metrics, weakening security for policyholders and bondholders.

In conjunction with its Global Reinsurance Outlook, Moody's launched a new quarterly newsletter, "Moody's Reinsurance Monitor." The publication contains articles on topical reinsurance issues from Moody's analysts internationally, and highlights recent research on the industry.