Moody's Investors Service Inc. has revised its outlook on the global reinsurance sector to stable from negative, the rating agency said Tuesday.

In a statement, Moody's said the change reflects “momentum for a hardening in reinsurance rates, a refocusing on the value of reinsurance, and the good risk management and discipline across the sector in response to recent catastrophe events.”

These positive trends look to neutralize the challenges facing the global reinsurance industry over the next 12 to 18 months, Moody's said in the report.

Growth in the supply of reinsurance has been checked by a series of large catastrophes recently, and the future reinsurance supply could further be constrained by higher retrocessional pricing and potential consolidation, the New York-based rating agency said in the analysis.

Insurers may not be able to further reduce their reinsurance purchasing, despite tight budgets, Moody's said, and demand could be boosted by cedents seeking greater reinsurance protection in response to Risk Management Solutions Inc.'s recently updated hurricane model.

“One large hurricane could tip the balance in favor of demand over supply,” Moody’s said.

Significant rate increases have been seen in loss-affected regions and lines of business in recent months. In addition, Moody’s said rates for short-tail lines not affected by losses have stabilized.

Future rate changes will depend on the outcome of the current Atlantic Hurricane season, but the rating agency said it “envisages broadly stable-to-strengthening prices at the forthcoming Jan. 1 renewals.”

Reinsurers’ profitability for 2011 is “under meaningful pressure,” Moody’s said.

Investment returns “remain suppressed” and many reinsurers already have exhausted their catastrophe budgets for this year‘s hurricane season, Moody’s said.

But Moody’s also said it believed that underlying loss ratios for reinsurers likely will stabilize during 2012 and that reserve levels are typically still adequate. The rating agency also said the relatively short average duration of reinsurers’ fixed-income portfolios may mean that investment income will not decline much further.

In the report, Moody’s said it had concerns that relatively low equity valuations of many reinsurers may mean that investors may be less willing to replenish equity capital in the wake of a large catastrophe.