A.M. Best said its rating for the global reinsurance sector remains "stable," although robust earnings reports mask challenges ahead, citing a convergence of market pressures, low interest rates, as well as tightening financial and market regulation that could strain the industry's capital.

Challenges globally, Mr. Andre said, include capital management, casualty pricing erosion, the overall soft pricing environment, the impact on loss reserves from inflation, reserve redundancies drying up, the low interest rate environment and conservative investment reallocation.

Long-term concerns are that companies will compete for market share because of disappointing pricing fundamentals, the threat of inflation and global regulatory changes, he added.

Mr. Andre noted one scenario in which the cost of claims could increase due to financial inflation, and another where claims frequency for certain business lines could be driven by weak economic conditions. These problems have not materialized to the extent that had been anticipated--although such scenarios might yet be realized, he warned.

Two possible defensive actions, he suggested, would be to hedge against inflation by buying inflation-linked securities and changing the mix of business to more short-tail lines.

To be successful, Mr. Andre said companies must have a strong focus on cycle management and pricing integrity; establish a demonstrated track record of stable, consistent results with no large losses relative to expectations compared to industry peers; and be cautious about moving outside of their core business.

But overall, he concluded, "the reinsurance model continues to work well. It is thriving."

As for merger and acquisition activity, he said major roadblocks include pricing, fit and company culture. The only notable merger since last year's Monte Carlo rendezvous was Alterra--the merger of Max Re and Harbor Point. This was motivated by a combination of "talents, lines of business and operating platforms," he said, noting that the company has a combined capital of $3.5 billion.

Mr. Trotter reported that in London, there is a "lack of finance to support deals." He noted uncertainties over Solvency II regulations for the European Union, scheduled to go into effect the end of 2011.

He also noted that while private equity firms see value in investing in Lloyd's, they don't see other London firms willing to accept low acquisition offers. However, he said, "the price might change if we are in a prolonged soft market."

Meanwhile, Fitch Ratings' outlook for the global reinsurance industry is also stable. The company said it expects competition to intensify in the global reinsurance industry, leading to pressure on earnings, but that reinsurers have proven to be among the most resilient in the financial sector throughout the financial crisis.

Chris Waterman, managing director in the Fitch Ratings insurance group in London, said the next 12-to-24 months will be a period of "notable differentiation" among companies as pressure mounts.

Because demand for reinsurance capacity has fallen among cedents, reinsurers are challenged to generate sustainable levels of investment income in the current low-interest-rate environment, he noted.

Moody's Investors Service has maintained a "negative" outlook on the industry, as credit fundaments are more likely to weaken than improve over the next 12-to-18 months, according to James Eck, vice president and senior credit officer, working out of London.

He said challenges the reinsurance sector faces include excess capacity, pressures on profitability and weak equity valuations, adding that ratings and outlooks assigned to individual companies reflect this view.

Stanislas Rouyer, senior vice president at Moody's, cited a restrained demand for reinsurance, pointing out that slow economic growth rates are reducing insurable activity, while strong balance sheets of primary insurers allow for more risk retention and tight reinsurance budgets.

Mr. Rouyer pointed out that in Moody's survey of primary insurers, 67 percent said they did not plan to buy property-catastrophe reinsurance in 2011, 28 percent said they did plan to buy the coverage, and 6 percent were not sure. That could change in a hurry, however, if there is another major catastrophe, he noted.

Over at Standard & Poor's the average rating in the sector is "A," while 77 percent of reinsurers rated for the past five years have had a stable outlook.

Rob Jones, managing director and European insurance criteria officer at S&P in London, speaking on a panel here, said that although the reinsurance industry weathered the crisis well, "we're back to where we were three years ago. It will continue unless we have a large loss event." He estimated such an event would need to be between $50 billion and $80 billion to significantly shift the market.

He said the potential impact of Solvency II regulations remains uncertain until the details are finalized, but noted that ultimately, "we see it as a positive for reinsurers."

He also said reinsurers are the best prepared in the industry in terms of enterprise risk management, while their capital position is strong. "The panic has passed, but the pain lingers," he noted.

Mr. Jones said positive rating factors in the global reinsurance outlook include the fact that:

o Capitalization is typically a ratings strength and in the aggregate is at peak levels.

o ERM capabilities are high, with reinsurers among the leading practitioners in the industry.

o Investments typically are focused on high-quality, short-duration liquid assets.

o Financial flexibility has improved in 2010.

o Profits continue to emerge on prior underwriting years.

However, he noted, negative rating factors include the fact that:

o Abundant capacity has created a demand/supply imbalance, exerting negative pressure on pricing.

o Low interest rates have been persistent, putting pressure on investment income.

o Uneconomic returns in some long-tail classes of business are evident.

o Prior-year reserve releases to help produce profits are not sustainable, in S&P's view.

o Investor confidence has partially returned, but some recapitalization risk remains because valuations are low and the hybrid market is largely dormant.

o Catastrophe activity has been high-frequency.

Other challenges for the industry, according to Mr. Jones, include a weak market for reinsurance thanks to excess capacity, as well as re-domestications away from Bermuda. "Will there be a new class in Bermuda, or more re-domestications to Ireland and other areas?" he wondered.

Mr. Jones noted, however, he believes reinsurers are in "good shape to face the challenges ahead."