S&P's Mr. Grant described a market at a crossroads between positive and negative directions, which he characterized as “the 'New Dawn' versus the 'False Dawn.'”

“We believe the industry is at a critical juncture, and it's going to go down one of two paths,” he told National Underwriter.

One path–the “New Dawn scenario”–would be characterized by “cross-cycle earnings adequately underpinned by vastly improved enterprise risk management and reinforced by more proactive capital management than has been seen in the past.”

He said the “False Dawn” scenario, on the other hand, would be “a continuation of what we've seen historically–which has been extreme pricing cycles and the extreme earnings that have resulted from those,” as well as an unwillingness of management teams to “actually put into practice what we believe are the strong ERM frameworks that they've been building up for the past couple of years.”

Mr. Grant said S&P is “cautiously optimistic in the 'New Dawn' scenario,” adding that this view is a reflection of the industry's “strong overall ERM credentials.” He said the enterprise risk management tools are there, but “whether or not they're willing to deploy them when it really counts is where the question is, which is why we're cautiously optimistic.”

He added that the rating agency believes there will be “less volatility than in the past, but we see there still will be some.” He noted that S&P believes the industry will fare better going forward than it has historically.

Damien Magarelli, a director with S&P in New York, said although the framework methodologies for ERM appear to be in place, what is untested among a number of reinsurers is their willingness to actually deploy those methodologies in a softening market.

Declining price adequacy is an obvious negative, he said. “It's a question of how far prices are allowed to climb before the industry's discipline kicks in.”

The last point, he noted, is the potential increase in the frequency and severity of natural catastrophes.

“I don't think it's so much whether or not we are in a hyperstate of natural catastrophe activity,” he said. “I think just the mere uncertainty surrounding that question–if we are in a heightened phase, what the cause of that is, and the extent to which that could be linked to global warming–that inherent uncertainty poses substantial challenges to the reinsurance sector.”

Mr. Magarelli said that although robust and improving ERM credentials are “supported by the 'New Dawn' scenario, the fact that most or many of the ERM frameworks are unseasoned is a negative factor.”

He said that an area where there is tangible evidence of a change in behavior is “the increasingly proactive capital management we've seen.” Already in 2007, he said, there have been $20 billion of shared buyback programs announced.

While the programs may or may not come to fruition in the coming years, “at least it is obviously a very strong signal of intent on behalf of the executive teams of many of the influential reinsurers within the industry,” Mr. Magarelli noted.

He added that this is a “critical juncture for the industry because the strong ERM frameworks we believe have been built will start to be tested–certainly into 2008, and likely into 2009.”

He said there were a number of aspects the rating agency would be looking at as signals of limited willingness on behalf of executive teams to actually put their ERM frameworks into action, including “a disconnect between medium-term business plans and capital management initiatives, and a spike in new business as a proportion of the portfolio underwritten.”

Mr. Magarelli said that having excess capital can distort management decision-making. In previous cycles, he said, “it was always perceived that more was more when it came to capital, when in actual fact, I think we're all coming to the realization now that in certain circumstances, less is more where capital is concerned.”

Best's Mr. Trotter said there recently had been discussion about loss of business for Lloyd's of London, “with companies succumbing to the enduring tax break” and the opportunity to write business with lower operating costs in Bermuda.

More recently, however, he said the situation has changed. The 2005 start-ups were “underplanned in terms of volume of business, the markets as a whole were cutting exposures, and there also were no major events in 2006.”

This led to a situation where underutilized capital surfaced in the market, he said. While some companies have paid this back to shareholders, their other option is seek acquisitions, he noted.

“We have seen Bermudians coming to London, Validus picking up with Talbot, and Ariel with Atrium,” he said, adding that overall, however, the two markets have been cooperating.

Mr. Trotter added that Lloyd's popularity is “at an all-time high,” for reasons including recent upgrades and the fact that Equitas–its runoff facility for pre-1993 losses–was taken over by National Indemnity, alleviating concerns.

Regarding securitization of risks, he said, there hasn't been a “great deal of take-up in London of deals of this nature.” The reason, he noted, is “the units in London tend to be small and the cost involved for securitization rather high.”

Despite all of the concerns raised about pricing pressures, the global reinsurance outlook is stable for 2007, said Matthew C. Mosher, group vice president of global property-casualty ratings with A.M. Best.

He noted that favorable earnings are anticipated, balance sheets are in relatively good shape, and ERM is firmly on the agenda. The impact on private reinsurers of Florida legislation allowing the state to take on more catastrophe risk, he said, is smaller than originally anticipated, market softening is clearly underway, and cycle management is being tested.

For cycle management, he said companies must:

o Demonstrate their ability to operate profitably across cycles.

o Show a proven track record of management.

o Have an active underwriting focus of senior management that is apparent in management meetings and demonstrated through long-term profitability.

Mark Nicholson, a director in Fitch Ratings' Insurance Group, said at a press conference here that there is no need for panic. While the reinsurance outlook is stable, however, “don't expect 2006 results to be replicated,” he warned.

Mr. Nicholson noted that in 2007 there were more upgrades than downgrades of reinsurers–15 downgrades to date in 2007, compared with 29 in 2003. Overall, the rating average is “A,” he said, adding that in 2003 there were no upgrades and there has been a gradual increase in upgrades since.

Trends that could impact the market are increasingly difficult market conditions as pricing pressures increase, as well as the ability for reinsurers to balance demands for return on capital with financial flexibility.

The industry's biggest near-term challenge is effectively managing the underwriting cycle–”a skill that has proven elusive in the past”–according to a new report issued by Fitch, “Reinsurance Review and Outlook: Conditions and Trends Support Stable Ratings.” The report is available online at www.fitchresearch.com.