The European insurance market may well be enjoying a period of stability but further natural catastrophes could leave a number of its companies under severe financial pressure according to a report from rating agency Standard & Poor’s (S&P).

The company has issued its “Industry Report Card: European Insurance", which warns that the current rosy climate could be wrecked by natural disasters.

"The U.S. hurricane season, further M&A activity, and a reduction in the boost to profits from investment markets could all threaten the market's stability, but we consider that most of the sector is well prepared for these risks," said Standard & Poor's credit analyst Hans Wright.

The report adds, while failures are not expected, further large losses because of U.S. storms would create both winners and losers, despite a strengthening of rates over the past couple of years. Losers would be those more dependent on third parties for recapitalizing and those heavily dependent on reinsurance/retrocession. Winners would be already well capitalized, with good diversification of risk.

"Ironically, a quiet hurricane season will damage the pricing environment going forward as buyers will view 2004/2005 as a blip and try to negotiate lower prices," said Mr. Wright.

The significant fall in equity markets in the second quarter of this year has provided a timely reminder of the risk to earnings and capital from exposure to equities. S&P said it considered that insurers are better prepared for volatility than in the past, with less exposure and actively managed downside risk.