MONACO (Reuters) - For a financial sector posting a double-digit rise in earnings and boasting large cash piles, reinsurers sure see a lot of storm clouds on the horizon.
That's because they are facing what many see as an unprecedented problem: an abundance of reinsurance supply coupled with a lack of demand from insurance company clients that is driving up competition among reinsurers and driving down prices for all of them.
The gloomy outlook has pressured the share prices of the world's top reinsurers this year and the frustration of normally staid industry executives - who gather this weekend at the Mediterranean resort of Monte Carlo for their annual jamboree - is palpable.
"I am disappointed, exasperated, and even rather appalled by what is happening in the market," said Nikolaus von Bomhard, chief executive of the world's biggest reinsurer, Munich Re.
"I've been in the business long enough to be able to say: this is bad news," he told a news conference last month.
Looking at reinsurers' current profits, things might seem fine.
The world's 31 top reinsurers - whose business is to help insurers pay big damage claims for disasters like hurricanes or earthquakes in exchange for part of the premium - posted a 12 percent rise in net income to $14 billion in the first six months of this year, compared with the same period last year, according to insurance broker Aon Benfield.
Unusually low payouts for natural catastrophes in recent years have also bolstered the bottom line, contributing to a rise in the amount of capital available for reinsurers to act as insurance companies to insurance companies - which Aon Benfield said increased by 6 percent to $570 billion at the end of June from the end of December.
On top of the big cash piles held by reinsurers such as Munich Re, Swiss Re and Hannover Re, outsiders have also been muscling in.
Capital market investors such as pension, hedge and sovereign wealth funds as well as wealthy individuals, looking for higher returns than they can find on government or corporate bonds, have been pouring money into the reinsurance market via specialized investment vehicles.
As if that were not enough, insurers like Allianz, Axa and Zurich are feeling financially stronger and more capable of retaining risk, prompting them to cut back on the amount of reinsurance protection they buy.
With the market shrinking, many reinsurers have been forced into successive rounds of price cuts or have granted improved terms and conditions to their customers to protect market share.
Credit rating agency Standard & Poor's sees prices on average down by 5-10 percent this year and next, with smaller and non-diversified reinsurers having the toughest time.
"Those who aren't able to defend their competitive positions and their bottom lines could struggle to survive," said S&P analyst Dennis Sugrue.
Consolidation among smaller players has long been predicted but little has come to pass so far. Market observers predict the internecine price war is unlikely to come to an end any time soon and share prices will remain under pressure.
The STOXX Europe 600 insurance index, which includes insurers and reinsurers, has risen by 4.8 percent since January - however this has been driven by insurers, with many reinsurers having lost ground.
Munich Re's shares have fallen by 2.4 percent and No.2 player Swiss Re's by 1.2 percent. French reinsurer Scor is down nearly 10 percent so far this year.
Faced with a difficult reinsurance market, big reinsurers are choosing to boost dividends and buy back their own shares, a move that credit rating agencies say makes sense.
"Returning capital to shareholders reduces the pressure to do something that has higher risk," said Moody's analyst Stan Rouyer.
"This is the right time to return capital to shareholders."
Editing by Pravin Char