In a new report on the global reinsurance sector, Moody's Investors Service concludes that restrained demand, overcapacity and fragile market confidence point to a higher chance that credit support will weaken rather than improve over the next 12 to 18 months. As a result, Moody's has changed the industry outlook to negative from stable. In a report entitled “Global Reinsurance Outlook,” Moody's said by most standards the sector has weathered the crisis better than most financial institutions, which makes it all the more surprising that the sector on average is still trading below book value. For an industry that is renowned for raising capital after major catastrophes or downturns, uncertain reception from the capital markets is a credit negative, particularly when signs point to greater price competition in 2010. “We think the reinsurance sector is operating with too much capacity but not enough certainty of capital,” noted Kevin Lee, vice president and author of the report. “The industry may be running with more capacity than what demand can absorb in the near term,” he explained. The economy has pushed down demand for insurance coverage, suppressed insurers' profits and thus restrained their reinsurance budgets. Easing of credit in recent months has also encouraged protection buyers to rely on other sources of capital besides (additional) reinsurance. Of the insurers that Moody's surveyed, the vast majority do not plan to buy more reinsurance next year and a fraction expect to buy less. As asset values have partly rebounded, reinsurers' solvency positions have rebounded.
