Spanish insurers face challenging environment in 2010

Spanish insurers will continue to suffer from the consequences of the recession and the restructuring of the domestic banking sector in 2010, Moody's Investors Service said in it’s a special comment on the challenges faced by the Spanish insurance industry.
"We believe that Spain's challenging macroeconomic environment will continue to pressurise Spanish insurers' profitability throughout 2010 in terms of (i) lower sales, (ii) an intensification of competition given higher sensitivity of buyers to price changes, (iii) an increase in property & casualty sector claims and (iv) and a risk of higher withdrawals from life policyholders," said Benjamin Serra, Moody's lead analyst for the Spanish insurance sector.
Furthermore, the difficulties faced by the Spanish banking sector, which continues to carry a negative outlook, are likely to have secondary effects on the insurance industry:
– Firstly, the ongoing deterioration of the financial strength of Spanish banks is adversely affecting the average quality of insurers' investments portfolios, which include significant amounts of debt issued by banks.
– Secondly, the bancassurance channel is the most important distribution channel in Spain for life insurance, and the expected consolidation of local savings banks (cajas) may significantly redistribute market shares in the life insurance sector. "Indeed, a large number of cajas currently involved in some form of consolidation have signed distribution agreements with various insurance companies, and these agreements will have to be terminated or renegotiated following the deals. Additionally, those cajas that receive state aid and other banks in need of liquidity may be prompted to divest their insurance subsidiaries, which could represent an opportunity for some insurers to gain market share. This in turn could lead to more concentration in the insurance sector, but also pose a threat to other players, which could lose some competitive advantages," explained Serra.
All Moody's ratings of Spanish insurance companies currently carry a negative outlook. Although Moody's believes that Spanish insurers will continue to benefit from their traditionally conservative management and note that most companies remain financially sound, the restructuring of the domestic banking sector and the impact of the macroeconomic environment have the potential to significantly weaken some selected insurers.
That said, Moody's would only expect to take further substantial negative rating actions in the event of a company's earnings capacity or market position weakening significantly, or their business model becoming significantly impaired as a result of the changes in the Spanish economy.