In a new report on the global reinsurance sector, Moody's Investors Service says 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.

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.

To assess this, Moody's conducted a survey of insurance companies -- both life and non-life, in U.S. and Europe -- to gauge their sentiment about reinsurance purchases in 2010. 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.

At the same time, Moody’s says reinsurance capacity is moving back into the sector in at least two ways. First, as asset values have partly rebounded, reinsurers' solvency positions have rebounded. According to Moody's, the top 40 reinsurers saw shareholder funds fall by about $50 billion between 2008 and 2007, but that deficit has been cut by nearly half in the first six months of 2009.