Things look good for reinsurance companies in 2007, so much so that credit rating organisation A.M. Best has revised its outlook for the global sector from a ?negative? to ?stable.?

The year is shaping up to be another potentially profitable one with favourable underwriting margins, according to the ratings firm.

However, the brighter news has been tempered by a caveat that things could change again if premium prices decrease and competition within the market place speeds up at a faster pace than predicted.

And A.M. Best is watching to see what impact the Florida Hurricane Catastrophe Fund will have on insurance and reinsurance companies? revenue.

A further ?wild card? is the billions of dollars of capital available as alternatives to traditional reinsurance through hedge funds and side cars.

A.M. Best has based its improved 2007 outlook on what is states as ?reinsurer rating actions likely to be affirmations with stable outlooks and only a modest amount of anticipated rating or outlook changes?.

Strong full-year financial performances amongst reinsurance companies, with many reporting record earnings, has also improved the reinsurance landscape.

But A.M. Best warns price deterioration and competition persisting at a faster pace than anticipated would result in the outlook swinging back to a ?negative.?

In a statement, the organisation said: ?Although mixed, the January 1 renewal set the tone for near-term optimism despite increased competition primarily associated with non-catastrophe exposed business lines. In 2006, adverse development on older casualty years slowed considerably for the majority of carriers, and the only meaningful noise of the year was adverse development relating to the 2005 hurricanes.?

The agency views 2007 as likely to be a profitable year given the potential for favourable underwriting margins in many lines of business and reinsurers reporting strong operating cash flow that will likely fuel investment income generation.

?Moreover, reinsurers are entering this softening phase of the market with replenished balance sheets due to earnings and improved loss reserving positions. While we expect 2007 should be another good year for the sector, the eventual outcome as always will be based on how well reinsurers manage their catastrophic exposures relative to capital at risk, given that the benign catastrophe season is unlikely to be repeated in 2007,? commented the firm.

But over the longer term optimism is ?dimmed? due to a feeling that market conditions will deteriorate, particularly for non-catastrophic exposed business.

A.M. Best said: ?Additionally, many cedants enjoying the strongest industry results in decades continue to retain more risk, thereby reducing the overall demand for reinsurance. With only recent history to serve as a guide, it is critical for participants to remember how quickly the good times can turn sour should the next ?unforeseen mega-event? unleash itself onto the industry.

?The issues with maintaining underwriting margins in light of increased competition will depend largely on how reinsurers monitor loss cost trends in key business segments and manage risk profiles.

?After the calm of 2006, the majority of reinsurers improved their respective risk profiles by managing aggregate exposures while beginning to fully embrace the concept of enterprise risk management. Nevertheless, it is our expectation reinsurers will have their capital management strategies tested on how to deploy capital while garnering adequate risk-adjusted return measures through this next market phase.

?The July 1, 2007 renewal was expected to be moderately calm for catastrophe risks with continued casualty price softening. However, a new wrinkle was thrown into the mix by the recent legislation changes in the state of Florida that include the near doubling of capacity provided by the Florida Hurricane Catastrophe Fund.

?With a significant portion of catastrophe premiums removed from the private reinsurance market, A.M. Best expects reinsurers attempting to fill catastrophe limits will likely shift capacity to other markets and could impact pricing in non-coastal property and casualty markets.?

And A.M. Best also sees another ?wild card? the potential magnitude that billions of dollars of additional and alternative forms of capital from hedge funds and the capital markets will have on the competitive landscape.

The firm said: ?Since 2005, sidecar formations, catastrophe bonds and industry loss warrantees offered options other than traditional reinsurance capacity. How this capital is deployed in the future will clearly affect underwriting margins and emphasise the importance of reinsurers holding the line on pricing and policy terms.?