"Nonetheless, the improved performance in equity markets is largely mitigated by most insurers having de-risked from equities," he said.

Moody's said that recessionary forces contributed to the reduction in consumer and corporate insurance expenditure, negatively impacting European insurers' revenues. Muted economic growth and high government borrowing levels will likely continue to depress revenues and investment returns.

Moody's observed that core profitability stabilized in 2009, "but the rating agency also noted concerns about non-life profitability, with non-life combined ratios (such as the net loss ratio and net expense ratio) rising as rate increases barely cover claims inflation," Mr. Oates said.

According to the report, non-life combined ratios have been rising as premium rate increases have barely covered claims inflation. In addition, weather-related losses impacted many companies in the first half of 2009, particularly in France and Germany--with windstorm "Klaus" and hailstorms "Wolfgang" and "Felix" costing about $5.3 billion, according to Swiss Re estimates.

This trend was repeated in early 2010 with windstorm "Xynthia" hitting France, Germany, Portugal and Spain in February, which may ultimately provide rationale for the industry to increase premium rates at a quicker rate, Moody's said.

Moody's also observed improvements in European insurers' regulatory solvency and shareholders' equity in 2009, noting that economic capital has shown significant improvement, largely driven by de-risking activities.

Moody's highlighted, however, that regulatory concerns remain for 2010 and 2011, as there is considerable uncertainty over the final form of Solvency II, which details the regulatory requirements for insurance firms that operate in the European Union.

Moody's cautioned that core earnings remain depressed, therefore the capital levels and fixed charge and interest coverage ratios of some rated European insurers remain below long-term rating expectations.

In terms of rating activity, Moody's said its rating actions on European Insurers have been limited during the first quarter of 2010: Prudential PLC's "A2" senior debt rating was affirmed and the negative outlook maintained following the announcement of its proposed $35 billion acquisition of AIG's Asia operations, and Swiss Re's "A1" insurer financial strength rating was affirmed with the outlook revised to stable from negative following de-risking of its legacy portfolios.

Among highlights noted in the report was a finding that:

o Recovery in the investment markets means the large unrealized losses seen in 2008 are not a recurring feature; however, the rise of equity markets is largely mitigated by most insurers having de-risked from equities.

o Revenues are generally lower than in 2008 as the recession has reduced consumer and corporate insurance spend, with the effect particularly pronounced for life and health insurance sales in the United Kingdom.

o Core profitability has stabilized, although life margins remain flat. In addition, Moody's said it is concerned about non-life profitability, with combined ratios rising in many countries.