NU Online News Service, Feb. 22, 2:05 p.m. EST

Underwriting profitability should improve for European property and casualty insurers, according to Moody’s Investors Service, but the insurers will have a harder time using reserve releases to smooth results.

In a special comment, Moody’s said European insurers are likely to continue their focus on profitable underwriting and defensive balance sheet management. “This discipline will be needed to support existing rating,” Moody’s said.

The rating agency said it expects improved profitability, but also said downgrades are possible for insurers if some possible adverse scenarios materialize.

Moody's said it is concerned with the sector’s exposure to European sovereign and bank fixed-income securities, which are experiencing a period of stress.

Antonello Aquino, a Moody’s vice president and senior credit officer, said the rating agency expects “only limited losses” for insurers stemming from their exposure to these securities, but added that the topic “will continue to be an area of focus in 2011, particularly if contagion risk spreads to a wider number of peripheral European countries with a cascade effect on the banking sector.”

Solvency II will also continue to be a hot topic, Moody’s said, although the rating agency added that it expects a “sensible and pragmatic” implementation of the new capital regime and does not expect rating changes. “Overall, the larger, more sophisticated groups seem likely to be best positioned to transition to the new capital regime,” Moody’s said.