The profit margins of Bermuda's insurers and reinsurers will come under increasing pressure next year as rates fall after a lack of major catastrophes this year, according to credit rating agency Moody's Investors Service.

In its annual report on the industry in Bermuda, Moody's said the group is facing multiple pressures, ranging from soft pricing to proposed US tax changes.

The Neal bill, which has been tabled in the US House of Representatives, would make most inter-company reinsurance arrangements between US subsidiaries and their Bermuda parent companies "uneconomic", Moody's added. Moody's pointed to the current good performance of the group, and said their present credit ratings already reflect the potential effects of these difficulties.

It said the companies had enjoyed "strong 2009 profitability" during a year that has been so far largely free of catastrophes.

Going forward, however — without a transformational catastrophic event — Moody's expects their profit margins to come under increasing pressure as rate decreases affect the top line, as investment income drops due to low yields, and as the favourable impact of reserve releases diminishes.

The report argues that the lingering after-effects of the credit crisis are likely to continue for some time, including potential inflation that could affect both loss cost trends on claims and the valuation of large fixed-income portfolios.

Continued volatility in capital markets is likely to cramp insurers' financial flexibility, and a there will likely be a surge in professional liability claims in the coming years.

Bermuda insurers may also eventually have to deal with the new legislative initiatives coming out of the US Congress if they become law, Moody's said.

"With an estimated 85 percent of premiums currently ceded to offshore affiliates likely to be in excess of the limitations prescribed by the proposed legislation," Moody's analyst James Eck said.

"The effective 'tax' on ceded premiums would make most inter-company reinsurance arrangements between US-based subsidiaries and Bermuda flagship companies uneconomic."

Mr. Eck's outlook for the casualty side of insurance was not too bright.

"With casualty rates continuing their downward trajectory, rate adequacy in many casualty lines is tenuous at best," Mr. Eck said.

"In fact, overcapacity, broker market consolidation, and budget constraints of buyers suggest that the current soft market for casualty risks may continue for some time."

The analyst believes Bermuda firms with sizeable casualty businesses will be challenged because "these companies remain vulnerable to shifts in loss cost trends, and the existence of sizeable reserve releases, which have heretofore bolstered calendar- year underwriting margins, may be coming to an end".