Despite an improvement in the financial strength of Europe's reinsurers, credit ratings are unlikely to return to their previous levels, ratings agency AM Best has warned.

AM Best analyst Stuart Shipperlee said that while financial results had improved, several factors were suppressing an improvement in ratings.

He said AM Best was forecasting European reinsurers to achieve combined ratios of around 100% for 2003, but that a break-even result in a year that featured both hard rates and benign weather was "not good enough".

"The absolute levels of underwriting profitability are not as strong as might be hoped for at this stage of the cycle," an AM Best statement said.

Shipperlee said other factors preventing ratings upgrades included a more balanced approach by reinsurers between retaining capital for capital adequacy and the need to achieve a better return on capital for shareholders.

Another factor preventing upgrades was the exposure to further adverse developments for those European reinsurers involved in US casualty business and other liability markets, such as employers' liability and professional indemnity in the UK.

Shipperlee confirmed that both property and aviation reinsurance rates were softening, with "increasing pressure on property pricing in the last few weeks."

He said that unless the softening market cycle in Europe proves to be shallow, questions remain over the ability of reinsurers to achieve underwriting profitability going forward.

He added that some capital had returned to the market since 2001, but it had not yet reached previous levels.