Global reinsurers are “at a critical point” from the combined effects of hefty claims from a series of catastrophes and an ongoing soft market, according to report about to be published by ratings agency AM Best.Bermuda and US reinsurers achieved a “solid result” of profitable underwriting last year, but face challenges ahead from increased expenses related to regulatory changes, low returns on investments, pricing pressure and unsustainable loss-reserve releases.The report finds that the earthquake in New Zealand and the earthquake and tsunami in Japan during the first quarter of this year overshadowed major 2010 catastrophes. It added that “the accumulation of losses over an extended period potentially could turn the reinsurance market”.Authored by AM Best analysts Robert DeRose and Greg Reisner, the report cautions that the effects of recent catastrophes on pricing might be short-lived, “yielding to a resumption of soft market conditions that would cause further destruction of capital and lead AM Best to place a negative outlook on the reinsurance sector”.Best’s Special Report on Global Reinsurance states: “A string of major catastrophes, a persistent soft market and the near exhaustion of excess reserves have placed global reinsurers at a critical point, and the industry’s response may determine whether AM Best’s outlook on the sector remains stable or turns negative.“Reinsurers face dual imperatives of surviving the soft market in the short term and positioning themselves for the eventual upward turn in pricing.”The report views the US and Bermuda reinsurance markets on a combined basis and states that the group achieved a combined ratio - the proportion of premium dollars spent on claims and expenses - of 92.7 percent, which it describes as “solid”, given the string of catastrophes last year including earthquakes in Chile and New Zealand and the Deepwater Horizon oil rig loss.Return on equity for the composite was 11.9 percent, aided by 6.2 points of favourable loss-reserve development.AM Best has previously noted, in December 2009 and a year later, that loss reserve releases are likely drying up, but it concedes: “That assumption may appear to be incorrect, given the level of favourable development experienced in 2010.”However, it notes that the pressure is mounting. “If the first-quarter catastrophe activity put a significant dent in a company’s results, management teams will have to consider carefully whether they want to use what may be their last bullet or worse yet, cheat now and pay later,” the report states.“Absent loss-reserve releases from prior years, the composite is delivering mid- to high-single-digit returns. Over the long term, even the medium term, these levels of returns are not going to whet investors’ appetites, which is evident given most of the companies’ price-to-book valuations.“More recently, however, many reinsurance stocks reached new highs. Is this a leading indicator of pricing improvements, or is it speculative capital placing some bets?“Unsustainable loss-reserve releases, persistent pricing pressures and yield-starved investment portfolios make for a challenging market environment. Increased regulation largely driven by Solvency II forces companies to add expenses, or at the very least strain their existing resources.”Solvency II, the name given to the new European Union regulatory regime for the insurance industry, is set to take effect in 2013. Many companies have dedicated substantial resources to preparations for the changes it will bring. For example, Catlin Group CEO Stephen Catlin said last year that his company had a dedicated team of 25 people working on it.“Catastrophes are always the wild card, and with the first-quarter events, the revised view for the full year is that the return on equity for the composite will be in the single digits it just isn’t clear whether it will be a negative or a positive number,” Best added.“It appears that 2011 is going to be a relative year. In a vacuum, a company’s results might not look stellar, but relative to the competition, they might be strong.”