It cautioned that much of the present stabilization for insurers is due to the return of investors' confidence in that market, "which may prove to be fickle."

Findings were contained in a special study providing an overview of the current condition of the global insurance and investment management industries.

Moody's Managing Director Ted Collins said, "The difficulty of the recovery can be seen clearly in the struggles of insurers and investment managers; their macroeconomic indicators--and ratings--may have reached a bottom, but the fundamentals of financial institutions are still vulnerable to a number of uncertainties."

"It must be recognized that recent signs of recovery are largely due to the investment market stabilization resulting from broad-based intervention by governments around the world, which paved the way for a partial restoration of investors' risk appetites," Mr. Collins added.

The report found that although the insurance industry has some exposure to below-investment-grade bonds and equities/alternatives, its key exposure is to the performance and default rates of the very substantial portfolios encompassing investment grade bonds and commercial mortgage loans.

During the first half of 2009, most insurers, the report said, experienced substantial credit migration in structured securities (particularly residential mortgage-backed securities) and financials, resulting in greater exposure to below-investment-grade bonds and much higher regulatory capital requirements.

"We believe that reported investment losses will continue to slowly drag on throughout 2009 (at 100-200 basis points of invested assets) and continue in 2010, given the steady pressures on most asset classes and the industry's practice of delaying losses until impairments are actually apparent," Moody's report declared.

Examining the p&c sector, Moody's said it is among the sectors least affected by the ongoing economic and capital market stress, but the impact has been considerably more pronounced for firms that are part of diversified insurance and financial institution groups. It noted that ratings had been lowered on p&c insurers affiliated with diversified groups such as Allstate, Hartford, Old Republic and XL Capital.

Moody's said it has a negative outlook for commercial lines insurers that reflects a continuing trend of flat to slightly negative pricing across most general casualty business lines, as well as a thinner economic cushion in insurers' claim reserves and somewhat weakened capital adequacy levels related to a combination of realized/unrealized investment losses and significant 2008 hurricane-related losses.

Mr. Collins said the report was prepared by an international team of senior analysts and the study appraises common global trends, including "issues specific to a variety of insurance companies--life, property and casualty, financial guarantors, and health and mortgage insurers--as well as those concerns relating to investment management entities such as asset managers, hedge funds and money market funds, across North America, Latin America, Europe and Asia."

Mr. Collins said while insurers' gains may be short-lived, "nevertheless, our ratings are based on the assumption that this market recovery will continue, if somewhat sluggishly."

"For most financial guaranty and mortgage insurers, which specialize in protecting against financial losses," Mr. Collins added, "the prospects for recovery are tied most directly to improvements in the residential mortgage markets, where the scope of actual and potential losses has squeezed their overall resources and damaged their reputations."

The report, third in Moody's
"Recoveries" series of publications, is available on Moodys.com. The full title of the report is "Are Insurers and Asset Managers on the Road to Recovery?"

Moody's said at 10 a.m. EDT next Tuesday it will hold a teleconference to discuss the topics in the report. More information and registration for the teleconference is available at www.moodys.com/events.