Spanish bank mergers could benefit large insurers

The ongoing restructuring of the Spanish banking system following the merging of several savings banks offers advantages to the country's largest insurance companies, said Moody's in its latest special comment report.

The restructuring will affect insurers due to the major role that banks play in the distribution of life products, the ratings agency said.

"We believe that large insurers with a competitive advantage in their distribution network through stronger banking groups are the likely candidates to benefit from the redistribution of insurance market shares," said Laura Perez Martinez, Moody's analyst and author of the report.

Benjamin Serra, Moody's assistant vice president for European insurance and co-author of the report, added: "Nevertheless, we only anticipate significant improvements for those insurers that are able to differentiate their product offering successfully from banking products towards non-life or protection insurance."

Many merged cajas, which now belong to larger banking groups, have signed exclusive bancassurance agreements or joint ventures with insurance providers that will now have to be renegotiated or cancelled. A royal decree requires consolidating banks to select a unique insurance provider by 2014.

Although the significant degree of consolidation between cajas has not yet triggered a similar consolidation of the insurance industry in Spain, Moody's believes it will lead to a significant shift of insurers' market shares over time.

Moody's outlined three potential scenarios for the redistribution of bancassurance agreements.

The first describes the current status quo with no renegotiation of agreements. This is unlikely to prevail in the long term, Moody's believes.

However, it could lead to the second scenario, which is characterised by a more moderate consolidation process, with different insurers per business line, or possibly per product.

Nevertheless, as stronger, more creditworthy banks consolidate, the likelihood increases for a more dramatic change, under which each enlarged banking group is aligned with a single insurer. This is what the report terms scenario three.

According to Moody's, all but the first scenario would be credit negative for the profiles of smaller players that distribute products through more vulnerable banks.

These players are less likely to be selected as partners by enlarged banking groups than their competitors, which often have deeper product and service capabilities.

In addition, there are also some disputes around exit penalties insurers may be entitled to receive on cancellation of agreements, which will exacerbate the negative implications for affected insurers if penalties are eventually reduced, the report said.