Catalana Occidente - Hold
Spanish Credit Insurance Aid
Current Price: €7.31
Target Price: €13.00

We expect the government to announce a support agreement for credit insurers in the coming weeks. This is good news for Catalana Occidente (GCO). Credit insurers play a key role in the Spanish economy, and their capacity to cut contracts immediately when they see a risk increase can have a strong negative effect on the economy. Press reports and companies say the government is close to completing a deal to provide support for the sector’s activities.

What could the support measures consist of? All the information provided in the press suggests a reinsurance solution whereby the Insurance Compensation Consortium (ICC) would take the role of the second reinsurer. The preliminary conditions in the agreement indicate that the ICC could take a tranche of the claims ratio (net of reinsurance) of between 85%-130% and the credit insurer will have to face those claims below and above that range. If we add the cost ratio for GCO on credit insurance (29.2% in 2008, acquisition plus administration costs), we estimate that the company would be protected in a combined ratio range of 115%-160% for 2009. The credit insurers would give the ICC a percentage of their profits (a level of around 3% has been mentioned) for the next 3-5 years, which we think is cheap compared to the losses that could arise in 2009 due to insolvencies. The final details on the agreement have not been defined yet and the government may actually approve the deal soon at one of its regular weekly cabinet meetings.

In our view, the reinsurance programme should substantially reduce the probability of GCO being forced to allocate more capital to its credit insurance lines. Note that GCO currently has a very strong capital position, with a 320% solvency ratio after goodwill (€401mn in 2008). The insolvency data in January were poor, with insolvencies/total maturities at 7.1% vs 5.4% in December 2008. The good news is that the insolvency growth rate seems to be stabilizing from very high levels: +37.3% YoY in January vs +83% YE08). We think that the reinsurance support programme could provide a floor for 2009 credit losses for insurers that should be well received by the market, so we still recommend a Hold and a €13.00/share.