New York: Despite the strong pricing environment in the US property and casualty insurance sector, it is still not bed of roses for the players.

Losses stemming from asbestos and environmental liability and directors and officers liability business, uncollectible reinsurance, backlash from abuses of surety contracts, terrorism, deteriorating asset quality, and a struggling economy are among the factors that bog them down, says Steve Dreyer, Standard & Poor’s (S&P) ratings services credit analyst and insurance practice leader.

According to him, S&P maintains a negative outlook on the sector but that the outlook would be reviewed again at mid-year. “If we can expect strong prices continuing well into 2004 and moderation in the negative factors, we might be inclined to revise the outlook to stable,” Dreyer adds.

He notes that for each of the past two years, S&P’s property and casualty rating downgrades have outnumbered upgrades by a margin of 20 to one. This year is shaping up to be less severe but S&P’s negative outlook signals that downgrades will continue to outnumber upgrades.

In addressing the uncollectible reinsurance problem, Dreyer observes: “Take a look at the huge reserve increases that are being announced by major property and casualty insurers for asbestos and environmental losses. In the same breath that they are announcing staggering multibillion dollar reserve increases.”

Although most ceding companies have acknowledged and accounted for some reinsurers being unable to pay, they have not accounted fully for the likelihood that these claims might be disputed by the reinsurers.

“There are so many loopholes in the Terrorism Risk Insurance Act that terrorism risk remains a major wild card for the industry. The federal backstop has provided psychological support but not strong financial support for insurance underwriters, which have no foundation for accurately pricing the risk,” adds Dreyer. “Also, it seems that those that need it aren’t buying it or aren’t buying enough because of what they perceive as high prices in a tough economy.”

Commenting on the influx of new reinsurers in Bermuda, he says: “There is a wide variety of business plans and shareholder expectations among the start-ups. It is misleading to think about the new companies as identical. In order for us to be comfortable in rating a start-up company, we have to be confident that the management team is capable and committed to sticking to a conservative business plan.

“Having lots of capital is a good start, but no start-up company is going to be assigned a rating at the very highest levels, nor would we foresee all the start-ups getting the same rating. They are very different companies with very different organisational structures, shareholder commitment, and competitive advantage.”

To date, S&P has assigned ratings only to Axis Specialty Insurance and DaVinci Reinsurance. Both companies have been assigned ‘A’ financial strength ratings.