In this issue of Global Reinsurance, we take a look at some of the factors impacting US business at the current time.

Like the rest of the major markets, the US re/insurance sector is on the ascendancy in terms of premium levels and the market outlook, but again in accord with the rest of the world, the poor performance of investment markets and increasing threat from liability business written many years ago is turning what could have been the hay days into yet another annus horribilis.

With the recent downgrades of Swiss Re and Munich Re, there are now only two reinsurers carrying the AAA rating, and almost every day sees another tranche of negative creditwatches or downwards rating emanating from the rating agencies. A special report put out by AM Best in early October confirmed that the downgrades in rating movements have been outstripping the upgrades in the year to 11 July 2002, with twice as many companies slipping down the rating scale as those ascending it. Of 350 rating changes during the period, 151 - 10% - were down while 76 - 5% - were up. This compares evenly with the previous 12-month period, where 148 of the 357 ratings actions were down (again representing 10% of the total), while 77 (5%) were up. Certain factors are constant between the two periods, such as loss cost inflation and increased asbestos and environmental liabilities, but the pricing environment has shifted dramatically over the two 12-month periods under examination.

Recent months have seen a marked shift in premium rates, as well as much tougher terms and conditions (although many still feel the correction level is yet to be attained). But the downward spiral of investment markets, fuelled by uncertainties in the global economic sphere and high impact accounting scandals, as well as the changed view of risk in the light of September 11, have left re/insurers paddling in a murky pool, and investors less than willing to dip their toes in.

Standard & Poor's recent estimate that $170bn net capital has left the international re/insurance industry over the past three years is an indication of just how much uncertainty there is about its viability. S&P analyst Rob Jones has identified an outflow of about $200bn, with around $30bn coming in from capital-raising by existing players and the arrival of new re/insurers. Mostly, this latter group has been supported by capital from some existing industry participants, seriously augmented by venture capital. Whether the venture will turn into vulture - if the results anticipated when the original investments were made do not come up to scratch - is still to be tested.

S&P noted that the industry has been "largely resilient" to the turbulent conditions it has been facing, but has recently met with a certain disinterest from the equity and debt markets. "Equity is being raised, but typically on highly discounted terms, and capital markets are increasingly conservative toward buying insurance debt," said Mr Jones. In fact, the "conservative" nature of the equity markets has led to the delay in several IPOs for reinsurers, though Montpelier Re's recent launch onto the New York Stock Exchange had CEO Tony Taylor smiling broadly as he closed the market on the day of the launch. On the debt side, "although some higher rate debt issuance from insurance companies has been successfully placed over the past year, the capital markets will only accommodate a limited amount of debt from any given sector," said Mr Jones. "Combined with the significant recent losses suffered by the insurance industry and a consequent lack of confidence, tolerance for insurance debt is limited." He didn't, however, expect this situation to last forever, and saw some light on the horizon. How far away that horizon is really depends on when the hard market conditions start filtering down into stated earnings. While some nay-sayers are suggesting the hard market may only have another year to run, Mr Jones was more confident. "Market profitability is expected to be very strong for 2003 and 2004," he said.

Of course, much of this hinges on the future loss experiences of the industry. As Gordon Feller points out in his article, `Price that's paid', another loss of the magnitude of September 11 could be a fatal blow for the sector. The uncertainty of terrorism exposures, coupled with the essential surprise element of a major terrorist atrocity, makes the whole risk arena almost impossible to assess. The US re/insurance sector continues to wait and see whether a federal backstop will be put in place, though lobbying by the National Association of Independent Insurers has successfully lowered the demands put on the industry by the Patriot Act.

Through all these trials and tribulations, the US re/insurance industry has survived, maybe not wholly intact, but definitely strong enough to continue in its role as a foundation stone of the country's economy.