Spanish market outlook improving

One of Europe’s biggest, and most sluggish, economies is seeing positive movements in its insurance market, but investments could be hit by interest rates changes.

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The outlook for Spain's insurance market has been upgraded to 'Stable'.

The Spanish insurance market has seen “profitability expected to improve, driven by higher investment returns and better technical margins”. This outlook came from AM Best’s Market Segment Report on Spain’s non-life insurance market. 

For the non-life segment, the rating agency has revised its outlook from Negative to Stable, which it said was due to the following factors: 

  • Segment growth supported by economic development 

  • Resilient profitability supported by premium rate increases 

  • Increased protection from Spain’s natural catastrophe scheme – the Consorcio de Compensación de Seguros – under discussion 

Last year, Fitch Ratings also said the markets were improving in Spain. “The Spanish operating environment will stabilise in 2024 leading to neutral sector outlooks for both life and non-life insurance.” 

This showed that investment in Spain was seen as profitable and had helped the industry massively over the past few years, but as interest rates potentially begin to fall it could change. Spain’s overall economy has positives and negatives; its unemployment rate is currently 11.6% down from 12.2% in 2023.

“AM Best expects investment returns to be a significant contributor to profitability, in 2024, driven mainly by higher yields on insurer’s fixed income portfolios,” said the report. “The hike in interest rates over the last two years has translated into significant investment losses for insurers in 2022 and 2023, although these were mainly unrealised.” 

In April, Spain’s long-term interest rate was recorded at 3.27%, compared to 3.19% last month and 3.40% last year. This was lower than the long-term average of 4.37%.

“We expect the start of Fed easing to be postponed till September,
but not cancelled.”

On European interest rates, the European Central Bank (ECB) – which had been rumoured to begin cuts in the summer – could change the dynamics yet again if it keeps rates higher, which more industry figures are beginning to point towards. “Amid reaccelerating US inflation, markets have axed rate cut expectations for all major central banks,” said Generali Investments, in its May Market Perspectives newsletter. “We expect the start of Fed easing to be postponed till September, but not cancelled. A first ECB rate cut remains due in June with at least quarterly cuts to follow thereafter.” 

AM Best added that during this period most companies operating in the segment have taken the opportunity to shift part of their fixed income portfolio towards higher yield bonds, realising their short-term losses but benefitting already from significantly higher returns in 2023.

The report added this was also expected to continue for several more quarters at least. 

MAPFRE, Spain’s largest insurer, said its portfolio grew 1.7% in Q1 this year compared to Q1 2023 to €44.7 billion, which was partly due to a 6.0% increase in corporate fixed income returns, a 5.5% return increase in real estate, and 0.9% increase in returns from government fixed income. Equity and mutual funds, and cash, however, saw decreases. 

Separately, it warned insurers of changes – currently largely unspecified – to the natural catastrophe protection scheme, known as “Consorcio”, which have come as a reaction to recent climate and weather events thought to be exacerbated by climate change. To combat this expense, the scheme is being partly overhauled to futureproof challenges to its profitability. 

“Increased support from the Consorcio is under discussion to further reduce volatility on [the non-life] segment’s bottom line,” said AM Best. “Economic growth and stabilising inflationary pressures in Spain are expected to support non-life insurance premium growth in the near term,” it added. “[We also expect] profitability levels to improve, driven mainly by higher investment returns.”

According to the European Commission’s May data, economic activity in Spain was expected to grow at 2.1% in 2024 and 1.9% in 2025, driven by domestic demand and sustained by continued labour market resilience. 

Inflation, year-on-year, is currently at 3.1%, down from 3.4% in 2023. 

Life market 

Separately, AM Best’s report on the country’s life market segment said it was improving from Negative to Stable. Once again, the higher interest rate environment was supporting growth in the segment. 

The most recent data from 2022 showed the life insurance market in Spain had written premiums of €24.5 billion. The non-life segment earned a premium volume of €40.2 billion. 

“While the sharp uptick in rate might have created temporary difficulties for insurers in terms of investment losses, overall, Spain’s life segment has been able to navigate this transition period successfully, owing mainly to its strong ALM capabilities and appropriate solvency and liquidity levels.”

"Profitability is expected to be enhanced by investment returns
on insurer’s own portfolios."

It added that technical results for the Spanish life segment grew by 2.4% during 2023 and that technical margins on life business were expected to remain stable going forward since the higher investment returns obtained on segregated portfolios are mostly passed on to policyholders. 

“Nonetheless, profitability is expected to be enhanced by investment returns on insurer’s own portfolios,” said AM Best. “Most companies in the life segment have taken the opportunity to shift part of their fixed income portfolios towards higher yield and higher credit quality bonds, realising short-term losses, but benefiting from significantly higher returns in 2023, as well as over the longer term.”