U.S. reinsurers' first-half 2010 results reflect catastrophes so far this year and the ongoing soft market, while future results hinge on the prospect of an active hurricane season, observers say.

Nineteen U.S. reinsurers surveyed by the Washington-based Reinsurance Assn. of America reported a 98.7% combined ratio for the first half of this year vs. 93.8% for the same period a year ago. Meanwhile, net premiums written decreased 4.2% to $12.29 billion.

The reinsurers reported $4.21 billion in net income vs. a $406.3 million loss during the same period last year, and $99.69 billion in policyholder surplus (see chart, page 24).

Bill Bergman, an analyst with Morningstar Inc. in Chicago, said the sector in general reported “modest premium declines, weak rates, possibly sluggish demand” and “meaningful but manageable” catastrophe losses in this year's first half.

Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York, said, “People saw the Deepwater Horizon losses and the Chilean earthquake losses and wanted to point to this as being a bad year, but it's sort of an average year.” The “big question this time of year is hurricane season,” he said.

James Auden, an analyst with Fitch Ratings in Chicago, said the losses of those insurers affected by the Chilean earthquake were “not too dramatic,” and much of the Deepwater Horizon oil rig losses were insured through the Lloyd's of London markets.

Reinsurers have been more disciplined than primary insurers, say observers.

Paul Newsome, an analyst with Sandler O'Neill & Partners L.P. in Chicago, said, “I think there are probably more companies who have taken the stance that they're just going to allow the business to go” rather than writing it at lower rates, compared with the primary sector.

James Eck, vp and senior analyst with Moody's Investors Service in New York, said that discipline seems to be holding up on the reinsurance side, but “some of the companies we talk to believe the discipline is starting to slip on the primary side, which I guess ultimately will flow through to the reinsurers.”

Meanwhile, reinsurance rates remain weak. “It's a tough picture” insofar as rates are concerned,” said Mr. Gallant.

Although rate adequacy in the reinsurance sector may be modestly better than in primary commercial lines, Mr. Auden said rate declines in many segments have made the business less profitable. “Returns aren't going to be great there,” he said.

“Casualty rates may be getting to the point where it's going to be very difficult for current accident years to be written under 100 (percent combined ratio) and some companies are exiting certain lines of business. Others are just reducing line sizes,” Mr. Eck said.

“We'll have to see what happens. At some point, the cycle will turn for casualty, but it doesn't appear it's going to happen anytime soon,” Mr. Eck said.

Observers are unsure, though, as to when the market will harden.

Greg Reisner, senior financial analyst at Oldwick, N.J.-based A.M. Best Co. Inc., said views as to when the cycle will turn depend “on how optimistic you are. Some people say it could be in the next six months; other people are saying 18 months.”

“If you look at the catastrophe losses, we've had close to $25 billion or so in the first six months,” said Amit Kumar, vp with Macquarie Securities Group in New York. “That has not been enough to result in any meaningful changes in rates, except for impacted segments.”

A major hurricane could alter the industry by removing the excess capital, he said.

“The big issue will be what happens at (Jan. 1) renewals” when there will be “even more capacity” in the absence of any major hurricane losses this year, Mr. Kumar said.

“My view is that you need another $20 billion or so to maybe at least halt the (rate) declines and $40 to $60 billion in losses would completely reverse the course of the market.” Barring that, Mr. Kumar said, the market will “continue to be really soft.”

Discussing the possibility of mergers and acquisitions among reinsurers, Fitch Ratings' Mr. Auden said, “For some time, we thought there could be more activity in Bermuda,” and that it is a “likely spot for acquisitions.” The potential is still there, he added.

“My sense is as pricing continues to go down, I think we can see another round of tie-ups, mergers or acquisitions,” said Mr. Eck. “That would be something that's going to depend on how companies look at the market once we get through this year.” It “may be one way to try to improve a company's diversification.” Another possibility is to “put two companies together and pay a special dividend.”

“From companies we talk to, we think the conditions are still ripe for it; and if conditions get a little worse,” it may increase M&A efforts, Mr. Eck said.

However, Taoufik Gharib, director at Standard & Poor's Ratings Services in New York, said the fact that stocks are trading below book value “does not help” in acquiring other companies. Furthermore, companies must be sure they are comfortable with the reserve positions of potential acquisitions.

Mr. Gharib predicted that, instead, “we'll see companies buy books of business, acquiring teams of underwriters or adding, maybe, to their existing teams” in cases where reinsurers do not have certain products or wish to offer a full gamut of products to the market.