Spanish insurers maintain strong profitability; non-life shines

Written by Adam Cadle

29/11/2019

The credit fundamentals of the Spanish insurance market are strong, with healthy profits in the life and non-life sectors, robust capitalisation, and sound reserving and investment practices, Fitch Ratings has said.

Spain offers significant opportunities for growth given the insurance penetration rate of 5.5%, lower than in other developed economies.

Return on equity (RoE) for the insurance sector has averaged 13% over the last 10 years, although returns have been more modest in recent years, as persistent low interest rates have depressed investment returns. However, profitability remains robust, with the sector's reported RoE at 11% in 2018.

In 2018, the non-life insurance sector expanded for the fifth year in a row. Premiums increased 4% (2017: 4%), with positive contributions from most lines. Fitch expects the Spanish non-life insurance sector to continue growing in line with or slightly above GDP in 2019-2020. However, growth is expected to slow as a consequence of a forecast decline in private consumption. Furthermore, demand for motor insurance is likely to decrease as car sales declined in 10M19 by 6.3% yoy after they had been recovering between 2012 and 2018. The Spanish non-life market should maintain strong technical profitability and a combined ratio at around 95% in 2019-2020. The ratio was strong in 2018 at 93.7% (2017: 94%).

The operating profitability of the life segment has been strong over the last eight years. In 2018, the sector's operating profit decreased to €2.3bn in 2018 (2017: €3bn) as low interest rates offset growth in assets under management. We expect profits to remain positive, but under pressure.

The Spanish insurance sector is strongly capitalised, supported by robust earnings. The Solvency Capital Requirement (SCR) coverage ratio was 239% at end-2018 (2017: 242%), one of the strongest in Europe. Nearly all Spanish insurers use the standard formula approach in their calculations of the SCR and make use of transitional measures on their annuity portfolios.

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