The book value of reinsurers in 2009 increased following capital market gains and low catastrophe losses. Despite the Deepwater Horizon oil disaster and Chilean earthquake in the first half of 2010, balance sheets remained strong but demand is lacklustre, reflecting slow global economic growth.
Moody’s senior credit officer and lead report author James Eck said: "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."
Eck added that the combination of rate decreases, lower investment income and diminishing reserve releases from old underwriting years was likely to affect reinsurers’ profitability.
Loosening of terms and conditions and the need to maintain equity capital in the fragile marketplace will continue to worsen the situation, according to Eck.
Too much capacity should not be confused with excess capital said Eck, 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.”
Rival agencies Standard & Poor's and Fitch both have stable outlooks on the industry.