NEW YORK (Bloomberg) – Global reinsurance prices dropped six percent for policies renewed on January 1 after catastrophe damage fell and capital markets improved, Marsh & McLennan Cos. said.

"The overall level of catastrophe losses activity in the world was much lower in 2009," Chris Klein, global head of business intelligence at Marsh's reinsurance brokerage Guy Carpenter & Co., said in an interview. "We've seen a significant rally in investment markets this year. Reinsurers' balance sheets are stronger than they were a year ago."

Reinsurers, a group led by Munich Re and Swiss Reinsurance Co., sell coverage to primary carriers to guard against the cost of major claims. Bermuda is one of the world's largest reinsurance markets.

Insurers have more capital and may cut back on protection as their own investments improve and customers' demand for coverage drops amid the recession, Mr. Klein said.

"If supply increases and demand does not increase then you expect to see pressure on prices," Mr. Klein said. Insurers "may be able to keep more risk if their balance sheets are stronger and they have more of a cushion to absorb losses".

The January renewal-rate decline compares with an eight percent increase a year earlier after capital was drained by costly storms, including Hurricanes Ike and Gustav, and the financial crisis, according to a separate report from Marsh & McLennan, the second-largest insurance brokerage.

The US escaped hurricane damage in 2009 as only two tropical storms, Ida and Claudette, made landfall. Mr. Klein said if catastrophe costs remain low and investment recovery sustains, he expects mid-year renewals to also reflect rate declines.

The Standard & Poor's 500 Index climbed 23 percent in 2009, compared with a 38 percent decline in 2008. Corporate bonds returned 26 percent in 2009 after an 11 percent loss in the previous year, according to Merrill Lynch data.

US property reinsurance rates fell six percent on average and US casualty lines dropped as much as ten percent, Guy Carpenter wrote in a report released yesterday.

European catastrophe rates fell as much as five percent and UK prices dropped as much as ten percent.

The drop in prices and a likely increase in catastrophe costs in 2010 will erode profit for reinsurers, said Michael Paisan, an analyst at Stifel Nicolaus & Co.

"Interest rates remain low still which means your investment income is going to decline a little bit," Mr. Paisan said. "Combine that with the fact you have lower pricing, undoubtedly means you are going to have a slowdown in earnings power this year versus 2009."

The increase in capital may prompt more reinsurers to consider acquisitions or share buybacks and dividends, Mr. Klein said.

"Funds are more available for companies with a convincing case to go out and acquire," he said. "The other prospect is returning money to shareholders."

Willis Group Holdings plc., the third-largest insurance broker, said in a report released last week that US property reinsurance rates declined five percent on average on policies that renewed on January 1.

"With the background of a continued softening, together with replenished capital bases, the mergers and acquisitions and capital management trend which emerged in the second half of 2009 will likely accelerate during the first half of 2010," Willis said in the report.

Validus Holdings Ltd. bought IPC Holdings Ltd. in September, combining two Bermuda-based reinsurers. PartnerRe Ltd., also based in Bermuda, said in July it would acquire Zug, Switzerland-based Paris Re Holdings Ltd.

Munich Re announced in October it will resume a share buy-back programme to repurchase as much as one billion euros ($1.43 billion) of stock after posting a 14 percent increase in second-quarter profit. The Munich-based company had suspended a program to repurchase about one billion euros of stock earlier in the year. Swiss Re shelved its buyback program in 2008 to preserve capital after wrong-way bets on credit-default swaps led to its first loss in almost six years.