"There May Not be Enough Capital to Go Around This Time"

The property/casualty reinsurance market may be one large wind event away from a major shakeout.

Reports issued today by Moody’s Investor Services and Aon Benfield say that despite having surplus capital and financing share buybacks earlier in the year, P/C reinsurers could face major problems if the 2010 hurricane season is as active as currently predicted.

“Unlike 2005, when capital flowed freely into the industry following record catastrophe losses, there may not be enough capital to go around this time, with investors likely to be much more discriminating,” said a report issued today from Moody’s. “Weaker franchises may be unable to recapitalize, forcing them to operate with higher financial leverage to the detriment of creditors.”

Reinsurers began the year with an improved capital base. According to the Aon report, reinsurer capital rose eight percent in the first quarter of 2010 after a strong rebound in the previous year. That “surplus capital” allowed several firms to conduct share repurchase plans with some issuing new debt to fund buybacks.

But Moody’s points out that reinsurers have been hit by significant cat losses during the first half of 2010, including Chile’s earthquake, Europe’s Windstorm Xynthia and the Deepwater Horizon oil rig disaster in the Gulf of Mexico.

Moody’s estimates that $15 billion to $20 billion of insured losses for both insurers and reinsurers, which would be close to all of the insured natural and man made cat losses of 2009.

With “virtually the entire reinsurance sector” currently trading below book value, the rating agency says it is “increasingly concerned” about reinsurers’s ability to replenish capital following a major catastrophic event.

P/C carriers are in a stronger position — the Aon report argues — with the U.S. P/C industry’s total level of capital about 15 percent higher in 2010.

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