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Mapfre difficulties compounded by S&P downgrade

Shares in the Spanish (re)insurer Mapfre are expected to open down sharply on 16 October, after S&P downgraded the firm below the crucial A- territory.

The rating agency stripped Mapfre of its insurer financial strength A- rating, downgrading to BBB+ with a negative outlook on the 15 October, because of its downgrade last week of the sovereign Spanish rating.

The latest downgrade will be another major headache for the (re)insurer as a move below A- territory typically triggers standard downgrade clauses with cedants, which could oblige the group to put up more collateral to secure its obligations or encourage buyers to change reinsurers.

It also comes just as the industry prepares for the 1 January renewal season, a key renewal date for the European markets.

In a statement today, S&P said that it would continue to maintain the firm's rating at the maximum permissible two notches above the government due to its diversified asset base that includes holdings in Latin America and the US.

Mapfre shares were falling again last week following the downgrade of Spain's sovereign debt. But while a downgrade for a US/Bermudian carrier below A- would spell almost certain death, European cedants have proven themselves more tolerant. In the last decade, both Scor and Converium have successfully traded out of such difficulties.

S&P has already downgraded other Spanish insurers to match the sovereign's BBB- rating, including Compañia Española de Seguros de Crédito a la Exportación (CESCE) and Allianz-owned Spanish direct insurer Fenix Directo.

It shifted Grupo Catalana Occidente (GCO) to BBB- one notch above the sovereign - due to its exposure to higher-rated Eurozone sovereigns through its trade credit insurance business.

The Spanish downgrade came a day after S&P lowered its rating on French insurer Groupama from BB to BB- after the company decided not to pay a coupon on some of its junior debt notes.

Meanwhile, AM Best painted a mixed portrait of the European non-life (re)insurance industry in recent special reports on the four largest continental markets.

The non-life industry grew in all four centres but there was a significant difference between premium growth in France at 4.6 percent and the straggler Spain, which posted just 0.6 percent growth after shrinking in 2010.

AM Best said rate increases were the key reason for rising overall premium income in France, whereas in Germany and Spain expansion in the motor insurance market drove up the premium base by 2.5 percent and 2.1 percent respectively.

Rate increases also contributed to growth in the German motor insurance market, but AM Best noted that this market was unique within Europe because insurers could lift premiums or cancel policies midway through the year.

However, despite rate increases the motor business remains unprofitable, AM Best said.

While Germany remains somewhat insulated from the Eurozone economic crisis domestically, AM Best said that continuing turbulence in investment markets and a weakening macroeconomic outlook for the country might put strains on insurer capitalisation in the future.

The agency praised the greater focus on underwriting discipline across Germany, France and Italy, as lacklustre investment results and motor claims force underwriters to take re-pricing action.

In contrast, the profitable Spanish non-life industry is now coming under pressure to compete on rates as it struggles to create demand in an extremely difficult economy, the agency said.

Spanish banks might also try to more aggressively enter the attractive non-life market, which could place extra pressure on banks, AM Best forecast.

The Italian industry is also facing a bleak outlook for demand, although new regulation has been introduced to help crack down on fraud, which may benefit loss ratios and transparency.

This comes while consolidation moves forward in Italy. The proposed merger of four companies including Unipol and Fondiaria is on track to create a rival of Generali's size.

Property rates were broadly flat in Italy throughout 2011, but may be on course to rise this year after the earthquakes in the agricultural and industrial Emilia Romagna region. General liability volumes also fell.

In France, AM Best said rate improvements should continue in 2012 and 2013, albeit at lower levels, as insurers have significantly improved their technical profitability over the past two years.

The French government is working on a scheme to reform its nat cat insurance system. This will retain the national reinsurer Caisse Centrale de Reassurance's dominant role in the system, but will reform the coverage provided to a list of named perils after the reinsurer was caught out by the Thai floods last year.

Meanwhile, the UK non-life market is partially insulated from financial instability in the Eurozone as insurers tend to hold sterling investments to match their liabilities, AM Best said, but added that market conditions remain challenging.

UK insurers have achieved modest rate increases for most business lines in 2011-12, but achieving appropriate pricing is difficult as economic problems are suppressing demand.

The delay of the Solvency II regime is another area of regulatory uncertainty for UK insurers

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